**Exhibit 99.4**

 

**TELUS CORPORATION**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**DECEMBER 31, 2008**

 

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management’s report

 

Management is responsible to the Board of Directorsfor the preparation of the Consolidated financial statements of the Company andits subsidiaries. These financial statements have been prepared in accordancewith Canadian generally accepted accounting principles (GAAP) and necessarilyinclude some amounts based on estimates and judgments.

 

The Company maintains a system ofinternal controls that provides management with reasonable assurance thatassets are safeguarded and that reliable financial records are maintained. Thissystem includes written policies and procedures, an organizational structurethat segregates duties and a comprehensive program of periodic audits by theinternal auditors. The Company has also instituted policies and guidelines thatrequire TELUS team members (including Board members and Company employees) tomaintain the highest ethical standards, and has established mechanisms for thereporting to the Audit Committee of accounting and ethics policy complaints. Inaddition, the Chief Compliance Officer works to ensure the Company hasappropriate policies, controls and measurements in place to facilitatecompliance with all legal and regulatory requirements. Annually, the Companyperforms an extensive risk assessment process, which includes interviews withsenior management, a web-enabled risk and control assessment survey distributedto a large sample of employees, and input from the Company’s strategic planningactivities. Results of this process influence the development of the internalaudit program. Key enterprise-wide risks are assigned to executive owners forthe development and implementation of appropriate risk mitigation plans. Asrequired by Canadian securities regulations and the United States *Sarbanes-Oxley Act*, the Company has an effective andefficient Sarbanes-Oxley certification enablement process. In addition toassessing disclosure controls and procedures and internal control overfinancial reporting, this process cascades informative certifications from thekey stakeholders, which are reviewed by the Chief Executive Officer and theChief Financial Officer as part of their due diligence process.

 

The Company has a formal policyon Corporate Disclosure and Confidentiality of Information, which sets outpolicies and practices including the mandate of the Disclosure Committee.

 

The Chief Executive Officer andthe Chief Financial Officer have evaluated the effectiveness of the Company’sdisclosure controls and procedures related to the preparation of theManagement’s discussion and analysis and the Consolidated financial statements,as well as other information contained in this report. They have concluded thatthe Company’s disclosure controls and procedures were effective, at areasonable assurance level, to ensure that material information relating to theCompany and its consolidated subsidiaries would be made known to them by otherswithin those entities, particularly during the period in which the Management’sdiscussion and analysis and the Consolidated financial statements contained inthis report were being prepared. In addition, the Chief Executive Officer andthe Chief Financial Officer have also evaluated the design and operatingeffectiveness of the Company’s internal control over financial reporting asexplained in the following report entitled Report of Management on InternalControl over Financial Reporting.

 

The Board of Directors hasreviewed and approved these Consolidated financial statements. To assist theBoard in meeting its oversight responsibilities, it has appointed an AuditCommittee, which is comprised entirely of independent directors. All themembers of the committee are financially literate and the Chair of thecommittee has financial expertise and meets the applicable securities lawrequirements as a financial expert. The committee oversees the Company’saccounting and financial reporting, internal controls and disclosure controls,legal and regulatory compliance, ethics policy and timeliness of filings withregulatory authorities, the independence and performance of the Company’sexternal and internal auditors, the management of the Company’s risks, itscreditworthiness, treasury plans and financial policy, and its whistleblowerand accounting and ethics complaint procedures. The committee meets no lessthan quarterly and, as a standard feature of regularly scheduled meetings,holds an in-camera session with the external auditors and separately with theinternal auditors without other management, including management directors,present. It oversees the work of the external auditors and approves the annualaudit plan. It also receives reports on the external auditor’s internal qualitycontrol procedures and independence. Furthermore, the Audit Committee reviews:the Company’s major accounting policies including alternatives and potentialkey management estimates and judgments; the Company’s financial policies andcompliance with such policies; the evaluation by either the internal orexternal auditors of management’s internal control systems; and the evaluationby management of the adequacy and effectiveness in the design and operation ofthe Company’s disclosure controls and internal controls over financialreporting. The Audit Committee also considers reports on the Company’s businesscontinuity and disaster recovery plan; reports on financial risk managementincluding derivative exposure and policies; tax planning, environmental, healthand safety risk management, corporate social responsibility and management’s

 

****

 

2

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approach for safeguarding corporate assets; annualreview of the Chair of Board of Directors, Chief Executive Officer andExecutive Leadership Team expenses and their use of corporate assets; andregularly reviews material capital expenditure initiatives. The committeepre-approves all audit, audit-related and non-audit services provided to theCompany by the external auditors (and its affiliates). The committee’s terms ofreference are available, on request, to shareholders and at **telus.com/governance**.

 
| /s/ Robert G. McFarlane      |   | /s/ Darren Entwistle         |
|------------------------------|--------|------------------------------|
|                         |   |                         |
| Robert G. McFarlane          |   | Darren Entwistle             |
| Executive  Vice-President    |   | President                    |
| and  Chief Financial Officer |   | and  Chief Executive Officer |
| February 11,  2009      |   | February 11,  2009      |

 

report of management oninternal control over financial reporting

 

Managementof TELUS Corporation (TELUS) is responsible for establishing and maintainingadequate internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting.

 

TELUS’Chief Executive Officer and Chief Financial Officer have assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008, in accordance with the criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Internal control overfinancial reporting is a process designed by, or under the supervision of, theChief Executive Officer (CEO) and the Executive Vice-President and ChiefFinancial Officer (CFO) and effected by the Board of Directors, management andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

Dueto its inherent limitations, internal control over financial reporting may notprevent or detect misstatements on a timely basis. Also projections of anyevaluation of the effectiveness of internal control over financial reporting tofuture periods are subject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. Based on this assessment, managementhas determined that the Company’s internal control over financial reporting iseffective as of December 31, 2008. In connection with this assessment, nomaterial weaknesses in the Company’s internal control over financial reportingwere identified by management as of December 31, 2008.

 

Deloitte & Touche LLP, the Company’s Independent RegisteredChartered Accountants, audited the Company’s Consolidated Financial Statementsfor the year ended December 31, 2008, and as stated in the Report ofIndependent Registered Chartered Accountants, they have expressed anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008.

 
| /s/ Robert G. McFarlane      |   | /s/ Darren Entwistle         |
|------------------------------|--------|------------------------------|
|                         |   |                         |
| Robert G. McFarlane          |   | Darren Entwistle             |
| Executive  Vice-President    |   | President                    |
| and  Chief Financial Officer |   | and  Chief Executive Officer |
| February 11,  2009      |   | February 11,  2009      |

 

****

 

3

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report of independentregistered chartered accountants

 

Tothe Board of Directors and Shareholders of TELUS Corporation

 

We haveaudited the accompanying consolidated statements of financial position of TELUSCorporation and subsidiaries (the Company) as of December 31, 2008 and2007, and the consolidated statements of income and other comprehensive income,retained earnings and accumulated other comprehensive income (loss) and cashflows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with Canadiangenerally accepted auditing standards and the standards of the Public CompanyAccounting Oversight Board (United States). These standards require thatwe plan and perform the audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, these consolidated financial statementspresent fairly, in all material respects, the financial position ofTELUS Corporation and subsidiaries as of December 31, 2008 and 2007,and the results of their operations and their cash flows for the years thenended in accordance with Canadian generally accepted accounting principles.

 

We have also audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), theCompany’s internal control over financial reporting as of December 31,2008, based on the criteria established in *Internal Control — IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 11, 2009, expressed anunqualified opinion on the Company’s internal control over financial reporting.

 
|   | /s/ Deloitte & Touche LLP            |
|--------|-----------------------------------------------|
|   |                                          |
|   | Deloitte & Touche LLP                |
|   | Independent  Registered Chartered Accountants |
|   | Vancouver,  Canada                            |
|   | February 11,  2009                       |

 

****

 

4

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report of independentregistered chartered accountants

 

Tothe Board of Directors and Shareholders of TELUS Corporation

 

Wehave audited the internal control over financial reporting of TELUS Corporationand subsidiaries (the Company) as of December 31, 2008, based on thecriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Report of Management on InternalControl over Financial Reporting. Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, basedon the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Wehave also audited, in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2008, of the Company and our report dated February 11,2009, expressed an unqualified opinion on those financial statements.

 
|   | /s/ Deloitte & Touche LLP            |
|--------|-----------------------------------------------|
|   |                                          |
|   | Deloitte & Touche LLP                |
|   | Independent  Registered Chartered Accountants |
|   | Vancouver,  Canada                            |
|   | February 11,  2009                       |

 

****

 

5

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consolidated statements ofincome and other comprehensive income

 
| **Years ended December 31 (millions except per share amounts)**                       | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| **OPERATING REVENUES**                                                                                                        | ** ** | **$**     | **9,653**  | ** ** | $          | 9,074 |   |
| **OPERATING EXPENSES**                                                                                                        |       |      | ** ** |       |       |
| Operations                                                                                                                    | ** ** | **5,815** | ** ** | 5,465      |       |
| Restructuring costs*(Note 7)*                                                                                                 | ** ** | **59**    | ** ** | 20         |       |
| Depreciation                                                                                                                  | ** ** | **1,384** | ** ** | 1,355      |       |
| Amortization of intangible assets                                                                                             | ** ** | **329**   | ** ** | 260        |       |
| ** **                                                                                                                    |       | **7,587** |       | 7,100      | ** ** |
| **OPERATING INCOME**                                                                                                          | ** ** | **2,066** | ** ** | 1,974      |       |
| Other expense, net                                                                                                            | ** ** | **36**    | ** ** | 36         |       |
| Financing costs*(Note 8)*                                                                                                     | ** ** | **463**   | ** ** | 440        |       |
| **INCOME BEFORE INCOME TAXES AND NON-CONTROLLING  INTEREST**                                                                  | ** ** | **1,567** | ** ** | 1,498      |       |
| Income taxes*(Note 9)*                                                                                                        | ** ** | **436**   | ** ** | 233        |       |
| Non-controlling interests                                                                                                     | ** ** | **3**     | ** ** | 7          |       |
| **NET INCOME AND COMMON SHARE AND NON-VOTING  SHARE INCOME**                                                                  | ** ** | **1,128** | ** ** | 1,258      |       |
| **OTHER COMPREHENSIVE INCOME*****(Note  19(c))*                                                                               |       |      | ** ** |       |       |
| Change in unrealized fair value of  derivatives designated as cash flow hedges                                                | ** ** | **(26**   | **)**      | 82         |       |
| Foreign currency translation adjustment  arising from translating financial statements of self-sustaining foreign  operations | ** ** | **2**     | ** ** | (7         | )          |
| Change in unrealized fair value of  available-for-sale financial assets                                                       | ** ** | **(2**    | **)**      | (1         | )          |
| ** **                                                                                                                    |       | **(26**   | **)**      | 74         |       |
| **COMPREHENSIVE INCOME**                                                                                                      | ** ** | **$**     | **1,102**  | ** ** | $          | 1,332 |   |
| **NET INCOME PER COMMON SHARE AND NON-VOTING  SHARE*****(Note 10)*                                                            |       |      | ** ** |       |       |
| – Basic                                                                                                                  | ** ** | **$**     | **3.52**   | ** ** | $          | 3.79 |   |
| – Diluted                                                                                                                | ** ** | **$**     | **3.51**   | ** ** | $          | 3.76 |   |
| **DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING  SHARE*****(Note 11)*                                                    | ** ** | **$**     | **1.825**  | ** ** | $          | 1.575 |   |
| **TOTAL WEIGHTED AVERAGE COMMON SHARES AND  NON-VOTING SHARES OUTSTANDING**                                                   |       |      | ** ** |       |       |
| – Basic                                                                                                                  | ** ** | **320**   | ** ** | 332        |       |
| – Diluted                                                                                                                | ** ** | **322**   | ** ** | 334        |       |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

consolidated statements ofretained earnings and accumulated other comprehensive income (loss)

 
| ** **                                                                                   | ** ** | **2008**               | ** ** | **2007**                                                  | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|
| **Years ended December 31  (millions)**                                       | ** ** | **Retained  earnings** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total** | ** ** | **Retained  earnings** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total** | ** ** |
| **BALANCE AT BEGINNING OF PERIOD**                                                           | ** ** | **$**                  | **1,458**  | ** **                                                | **$**      | **(104** | **)** | **$** | **1,354** |   | $ | 1,200 |   | $ | (178 | ) | $ | 1,022 |   |
| Income                                                                                       | ** ** | **1,128**              | ** ** | **(26**                                                   | **)**      | **1,102** |   | 1,258 |   | 74 |   | 1,332 |   |
| ** **                                                                                   | ** ** | **2,586**              | ** ** | **(130**                                                  | **)**      | **2,456** |   | 2,458 |   | (104 | ) | 2,354 |   |
| Common Share and Non-Voting Share dividends  paid, or payable, in cash *(Note 11)* | ** ** | **(584**               | **)**      | **—**                                                | ** ** | **(584** | **)** | (521 | ) | — |   | (521 | ) |
| Purchase of Common Shares and Non-Voting  Shares in excess of stated capital*(Note 19(f))*   | ** ** | **(143**               | **)**      | **—**                                                | ** ** | **(143** | **)** | (483 | ) | — |   | (483 | ) |
| Other                                                                                        | ** ** | **—**             | ** ** | **—**                                                | ** ** | **—** |   | 4 |   | — |   | 4 |   |
| **BALANCE AT END OF PERIOD ***(Note 19(a))*                                             | ** ** | **$**                  | **1,859**  | ** **                                                | **$**      | **(130** | **)** | **$** | **1,729** |   | $ | 1,458 |   | $ | (104 | ) | $ | 1,354 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

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6

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consolidated statements offinancial position

 
| **As at December 31 (millions)**              | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **ASSETS**                                                        |       |       |       |     |       |
| Current  Assets                                                   |       |       |       |     |       |
| Cash and temporary investments, net                               | ** ** | **$**      | **4**      |     | $          | 20 |   |
| Short-term investments                                            | ** ** | **—** |       | 42       |       |
| Accounts receivable*(Notes 14, 21(b))*                       | ** ** | **966**    |       | 711      |       |
| Income and other taxes receivable                                 | ** ** | **25**     |       | 121      |       |
| Inventories*(Note  21(b))*                                        | ** ** | **333**    |       | 243      |       |
| Prepaid expenses and other*(Note 21(b))*                          | ** ** | **220**    |       | 200      |       |
| Derivative assets*(Note  5(h))*                                   | ** ** | **10**     |       | 4        |       |
| ** **                                                        |       | **1,558**  |       | 1,341    |       |
| Capital Assets, Net*(Note 15)*                                    |       |       |       |     |       |
| Property, plant, equipment and other                              | ** ** | **7,317**  |       | 7,196    |       |
| Intangible assets subject to amortization                         | ** ** | **1,317**  |       | 959      |       |
| Intangible assets with indefinite lives                           | ** ** | **3,849**  |       | 2,967    |       |
| ** **                                                        |       | **12,483** |       | 11,122   |       |
| Other Assets                                                      |       |       |       |     |       |
| Deferred charges*(Note  21(b))*                                   | ** ** | **1,513**  |       | 1,318    |       |
| Investments                                                       | ** ** | **42**     |       | 39       |       |
| Goodwill*(Note 16)*                                               | ** ** | **3,564**  |       | 3,168    |       |
| ** **                                                        |       | **5,119**  |       | 4,525    |       |
| ** **                                                        |       | **$**      | **19,160** |     | $          | 16,988 |   |
|                                                              |       |       |       |     |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                     |       |       |       |     |       |
| Current Liabilities                                               |       |       |       |     |       |
| Accounts payable and accrued liabilities*(Note 21(b))*            | ** ** | **$**      | **1,465**  |     | $          | 1,476 |   |
| Income and other taxes payable                                    | ** ** | **163**    |       | 7        |       |
| Restructuring accounts payable and accrued  liabilities*(Note 7)* | ** ** | **51**     |       | 35       |       |
| Dividends payable                                                 | ** ** | **151**    |       | —   |       |
| Advance billings and customer deposits*(Note 21(b))*              | ** ** | **689**    |       | 632      |       |
| Current maturities of long-term debt*(Note 18)*                   | ** ** | **4**      |       | 5        |       |
| Current portion of derivative liabilities*(Note 5(h))*            | ** ** | **75**     |       | 27       |       |
| Current portion of future income taxes                            | ** ** | **459**    |       | 504      |       |
| ** **                                                        |       | **3,057**  |       | 2,686    |       |
| Long-Term Debt*(Note 18)*                                         | ** ** | **6,348**  |       | 4,584    |       |
| Other Long-Term Liabilities*(Note 21(b))*                         | ** ** | **1,295**  |       | 1,718    |       |
| Future Income Taxes                                               | ** ** | **1,255**  |       | 1,048    |       |
| Non-Controlling Interests                                         | ** ** | **23**     |       | 26       |       |
| Shareholders’ Equity*(Note 19)*                              | ** ** | **7,182**  |       | 6,926    |       |
| ** **                                                        |       | **$**      | **19,160** |     | $          | 16,988 |   |

 

Commitmentsand Contingent Liabilities *(Note 20)*

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 
| Approved  by the Directors: |   |                   |
|-----------------------------|--------|------------------------|
|                        |   |                   |
| Director:                   |   | Director:              |
|                        |   |                   |
| /s/ Brian  F. MacNeill      |   | /s/ Brian  A. Canfield |
|                        |   |                   |
| Brian  F. MacNeill          |   | Brian  A. Canfield     |

 

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consolidated statements of cashflows

 
| **Years ended December 31 (millions)**                                                      | ** ** | **2008**    | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| **OPERATING ACTIVITIES**                                                                                        |       |        | ** ** |       |       |
| Net income                                                                                                      | ** ** | **$**       | **1,128**  | ** ** | $          | 1,258 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:                                  |       |        | ** ** |       |       |
| Depreciation and amortization                                                                                   | ** ** | **1,713**   | ** ** | 1,615      |       |
| Future income taxes                                                                                             | ** ** | **161**     | ** ** | 377        |       |
| Share-based compensation*(Note 12(a))*                                                                          | ** ** | **5**       | ** ** | 96         |       |
| Net employee defined benefit plans expense                                                                      | ** ** | **(102**    | **)**      | (92        | )          |
| Employer contributions to employee defined  benefit plans                                                       | ** ** | **(104**    | **)**      | (93        | )          |
| Restructuring costs, net of cash payments*(Note 7)*                                                             | ** ** | **16**      | ** ** | (18        | )          |
| Amortization of deferred gains on  sale-leaseback of buildings, amortization of deferred charges and other, net | ** ** | **3**       | ** ** | 4          |       |
| Net change in non-cash working capital*(Note 21(c))*                                                            | ** ** | **(1**      | **)**      | 25         |       |
| Cash provided by operating activities                                                                           | ** ** | **2,819**   | ** ** | 3,172      |       |
| **INVESTING ACTIVITIES**                                                                                        |       |        | ** ** |       |       |
| Capital expenditures excluding advanced  wireless services spectrum licences*(Notes 6, 15)*                | ** ** | **(1,859**  | **)**      | (1,770     | )          |
| Payment for advanced wireless services  spectrum licences*(Note 6)*                                             | ** ** | **(882**    | **)**      | —     |       |
| Acquisitions*(Note 16)*                                                                                         | ** ** | **(696**    | **)**      | —     |       |
| Proceeds from the sale of property and  other assets                                                            | ** ** | **13**      | ** ** | 7          |       |
| Change in non-current materials and  supplies, purchase of investments and other                                | ** ** | **(9**      | **)**      | (9         | )          |
| Cash used by investing activities                                                                               | ** ** | **(3,433**  | **)**      | (1,772     | )          |
| **FINANCING ACTIVITIES**                                                                                        |       |        | ** ** |       |       |
| Common Shares and Non-Voting Shares issued                                                                      | ** ** | **—**  | ** ** | 1          |       |
| Dividends to shareholders*(Note 11)*                                                                            | ** ** | **(433**    | **)**      | (521       | )          |
| Purchase of Common Shares and Non-Voting  Shares for cancellation*(Note 19(f))*                                 | ** ** | **(280**    | **)**      | (750       | )          |
| Long-term debt issued*(Notes 18, 21(c))*                                                                   | ** ** | **12,983**  | ** ** | 7,763      |       |
| Redemptions and repayment of long-term debt*(Notes 18, 21(c))*                                                  | ** ** | **(11,667** | **)**      | (7,857     | )          |
| Dividends paid by a subsidiary to  non-controlling interests                                                    | ** ** | **(5**      | **)**      | (4         | )          |
| Other                                                                                                           | ** ** | **—**  | ** ** | (1         | )          |
| Cash provided (used) by financing  activities                                                                   | ** ** | **598**     | ** ** | (1,369     | )          |
| **CASH POSITION**                                                                                               |       |        | ** ** |       |       |
| Increase (decrease) in cash and temporary  investments, net                                                     | ** ** | **(16**     | **)**      | 31         |       |
| Cash and temporary investments, net,  beginning of period                                                       | ** ** | **20**      | ** ** | (11        | )          |
| Cash and temporary investments, net, end of  period                                                             | ** ** | **$**       | **4**      | ** ** | $          | 20 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOWS**                                                                       |       |        | ** ** |       |       |
| Interest (paid)*(Note  21(c))*                                                                                  | ** ** | **$**       | **(457**   | **)**      | $          | (454 | ) |
| Interest received                                                                                               | ** ** | **$**       | **3**      | ** ** | $          | 42 |   |
| Income taxes (inclusive of Investment Tax  Credits*(Note 9)*) (paid) received, net                              | ** ** | **$**       | **(10**    | **)**      | $          | 123 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

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8

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notes to consolidated financialstatements

 

**DECEMBER31, 2008**

** **

TELUSCorporation was incorporated under the *Company Act*(BritishColumbia) on October 26, 1998, under the name BCT.TELUS CommunicationsInc. (BCT). On January 31, 1999, pursuant to a court-approved plan ofarrangement under the *Canada BusinessCorporations Act* among BCT, BC TELECOM Inc. (BC TELECOM) and theformer Alberta-based TELUS Corporation (TC), BCT acquired all of the shares ofBC TELECOM and TC in exchange for Common Shares and Non-Voting Shares of BCT.Subsequently on January 31, 1999, BC TELECOM was dissolved. On May 3,2000, BCT changed its name to TELUS Corporation and in February 2005, theCompany transitioned under the *Business Corporations Act*(British Columbia), successor to the *Company Act*(BritishColumbia). TELUS Corporation maintains its registered office at Floor 21,3777 Kingsway, Burnaby, British Columbia, V5H 3Z7.

 

TELUS Corporation is one of Canada’s largesttelecommunications companies, providing a full range of telecommunicationsproducts and services. The Company is the largest incumbent telecommunicationsservice provider in Western Canada and provides data, Internet protocol, voiceand wireless services to Central and Eastern Canada.

 
| **Notes to consolidated financial statements** | ** **                                  | **Page** | ** ** | **Description** |
|--------------------------------------------------------------------|---------------------------------------------|----------|------------|-----------------|
| General  application                                               |                                        |     |       |            |
| 1.                                                                 | Summary  of significant accounting policies |     | 10         |            | Summary  review of accounting principles and the methods used in their application by  the Company |
| 2.                                                                 | Accounting  policy developments             |     | 17         |            | Summary  review of generally accepted accounting principle developments that do, will,  or may, affect the Company |
| 3.                                                                 | Capital  structure financial policies       |     | 20         |            | Summary  review of the Company’s objectives, policies and processes for managing its  capital structure |
| 4.                                                                 | Regulation  of rates charged to customers   |     | 21         |            | Summary  review of rate regulation impacts on Company operations and revenues |
| 5.                                                                 | Financial  instruments                      |     | 23         |            | Summary  schedules and review of financial instruments, including the management of  associated risks and fair values |
| Consolidated  results of operations focused                        |                                        |     |       |            |
| 6.                                                                 | Segmented  information                      |     | 30         |            | Summary  disclosure of segmented information regularly reported to the Company’s chief  operating decision maker |
| 7.                                                                 | Restructuring  costs                        |     | 32         |            | Summary  continuity schedule and review of restructuring costs |
| 8.                                                                 | Financing  costs                            |     | 32         |            | Summary  schedule of items comprising financing costs by nature |
| 9.                                                                 | Income  taxes                               |     | 33         |            | Summary  reconciliations of statutory rate income tax expense to provision for income  taxes and analyses of future income tax liability |
| 10.                                                                | Per  share amounts                          |     | 33         |            | Summary  schedule and review of numerators and denominators used in calculating per  share amounts and related disclosures |
| 11.                                                                | Dividends  per share                        |     | 34         |            | Summary  schedule of dividends declared |
| 12.                                                                | Share-based  compensation                   |     | 34         |            | Summary  schedules and review of compensation arising from share option awards,  restricted stock units and employee share purchase plan |
| 13.                                                                | Employee  future benefits                   |     | 37         |            | Summary  and review of employee future benefits and related disclosures |
| Consolidated  financial position focused                           |                                        |     |       |            |
| 14.                                                                | Accounts  receivable                        |     | 43         |            | Summary  schedule and review of arm’s-length securitization trust transactions and  related disclosures |
| 15.                                                                | Capital  assets                             |     | 45         |            | Summary  schedule of items comprising capital assets |
| 16.                                                                | Goodwill                                    |     | 46         |            | Summary  schedule of goodwill and review of reported fiscal year acquisitions from  which goodwill arose |
| 17.                                                                | Short-term  obligations                     |     | 48         |            | Summary  review of bilateral bank facilities |
| 18.                                                                | Long-term  debt                             |     | 49         |            | Summary  schedule of long-term debt and related disclosures |

 

****

 

9

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notes to consolidated financialstatements

 
| **Notes to consolidated financial statements** | ** **                                                                                     | **Page** | ** ** | **Description** |
|--------------------------------------------------------------------|------------------------------------------------------------------------------------------------|----------|------------|-----------------|
| Consolidated  financial position focused (continued)               |                                                                                           |     |       |            |
| 19.                                                                | Shareholders’  equity                                                                     |     | 51         |            | Summary  schedules and review of shareholders’ equity and changes therein including  details of other comprehensive income, accumulated other comprehensive  income, share option price stratification and normal course issuer bid  summaries |
| 20.                                                                | Commitments  and contingent liabilities                                                        |     | 56         |            | Summary  review of contingent liabilities, lease obligations, guarantees, claims and  lawsuits |
| Other                                                              |                                                                                           |     |       |            |
| 21.                                                                | Additional  financial information                                                              |     | 60         |            | Summary  schedules of items comprising certain primary financial statement line items |
| 22.                                                                | Differences  between Canadian and United States generally accepted accounting  principles |     | 62         |            | Summary  schedules and review of differences between Canadian and United States  generally accepted accounting principles as they apply to the Company |

 

## 1                  summary of significant accounting policies

 

The accompanying consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in Canada andare expressed in Canadian dollars.

 

Theterms TELUS or Company are used to mean TELUS Corporation and, where thecontext of the narrative permits, or requires, its subsidiaries.

 

**(a)****          Consolidation**

### ** **

Theconsolidated financial statements include the accounts of the Company and allof the Company’s subsidiaries, of which the principal one is TELUSCommunications Inc.  Currently, throughthe TELUS Communications Company partnership and the TELE-MOBILE COMPANYpartnership, TELUS Communications Inc. includes substantially all of theCompany’s Wireline segment’s operations and all of the Wireless segment’soperations.

 

The financing arrangements of the Company and all of itssubsidiaries do not impose restrictions on inter-corporate dividends.

 

On a continuing basis, TELUS Corporation reviews itscorporate organization and effects changes as appropriate so as to enhance itsvalue. This process can, and does, affect which of the Company’s subsidiariesare considered principal subsidiaries at any particular point in time.

 

### **(b)**          Use of estimates

### ** **

Thepreparation of financial statements in conformity with generally acceptedaccounting principles (GAAP) requires management to make estimates andassumptions that affect: the reported amounts of assets and liabilities at thedate of the financial statements; the disclosure of contingent assets andliabilities at the date of the financial statements; and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

Examples of significant estimates include:

 
| · | the  key economic assumptions used to determine the fair value of residual cash  flows arising from accounts receivable securitization;                      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | the  allowance for doubtful accounts;                                                                                                                        |
| · | the  allowance for inventory obsolescence;                                                                                                                   |
| · | the  estimated useful lives of assets;                                                                                                                       |
| · | the  recoverability of tangible assets;                                                                                                                      |
| · | the  recoverability of intangible assets with indefinite lives;                                                                                              |
| · | the  recoverability of long-term investments;                                                                                                                |
| · | the  recoverability of goodwill;                                                                                                                             |
| · | the  amount and composition of income tax assets and income tax liabilities,  including the amount of unrecognized tax benefits;                             |
| · | the  accruals for Canadian Radio-television and Telecommunications Commission  (CRTC) deferral account liabilities; and                                      |
| · | certain  actuarial and economic assumptions used in determining defined benefit  pension costs, accrued pension benefit obligations and pension plan assets. |

 

****

 

10

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notes to consolidated financialstatements

 

### **(c)**   Revenuerecognition

 

TheCompany earns the majority of its revenue (voice local, voice long distance,data (including data and information technology managed services) and wirelessnetwork) from access to, and usage of, the Company’s telecommunicationsinfrastructure. The majority of the balance of the Company’s revenue (other andwireless equipment) arises from providing products and services facilitatingaccess to, and usage of, the Company’s telecommunications infrastructure.

 

TheCompany offers complete and integrated solutions to meet its customers’ needs.These solutions may involve the delivery of multiple services and productsoccurring at different points in time and/or over different periods of time. Asappropriate, these multiple element arrangements are separated into theircomponent accounting units, consideration is measured and allocated amongst theaccounting units based upon their relative fair values and then the Company’srelevant revenue recognition policies are applied to the accounting units.

 

Multiplecontracts with a single customer are normally accounted for as separatearrangements. In instances where multiple contracts are entered into with acustomer in a short period of time, they are reviewed as a group to ensurethat, similar to multiple element arrangements, relative fair values areappropriate.

 

TheCompany’s revenues are recorded net of any value-added, sales and/or use taxesbilled to the customer concurrent with a revenue-producing transaction.

 

*Voice local, voice long distance, data and wirelessnetwork:*The Companyrecognizes revenues on the accrual basis and includes an estimate of revenuesearned but unbilled. Wireline and wireless service revenues are recognizedbased upon usage of the Company’s network and facilities and upon contractfees.

 

Advancebillings are recorded when billing occurs prior to rendering the associatedservice; such advance billings are recognized as revenue in the period in whichthe services are provided. Similarly, and as appropriate, upfront customeractivation and connection fees, along with the corresponding direct costs notin excess of the revenues, are deferred and recognized over the averageexpected term of the customer relationship.

 

Whenthe Company receives no identifiable, separable benefit for consideration givento a customer (*e.g.* discounts andrebates), the consideration is recorded as a reduction of revenue rather thanas an expense.

 

The Company follows the liability method ofaccounting for its quality of service rate rebate amounts that arise from thejurisdiction of the CRTC.

 

TheCRTC has established a portable subsidy mechanism to subsidize Local ExchangeCarriers, such as the Company, that provide residential service to high costserving areas. The CRTC has determined the per line/per band portable subsidyrate for all Local Exchange Carriers. The Company recognizes the portablesubsidy on an accrual basis by applying the subsidy rate to the number ofresidential network access lines it has in high cost serving areas, as furtherdiscussed in Note 4(c). Differences, if any, between interim and final subsidyrates set by the CRTC, are accounted for as a change in estimate in the periodin which the CRTC finalizes the subsidy rate.

 

*Other andwireless equipment*: The Company recognizes product revenues,including wireless handsets sold to re-sellers and customer premises equipment,when the products are delivered and accepted by the end-user customers.Revenues from operating leases of equipment are recognized on a systematic andrational basis (normally a straight-line basis) over the term of the lease. When the Company receives no identifiable,separable benefit for consideration given to a customer (*e.g.* discounts and rebates), the considerationis recorded as a reduction of revenue rather than as an expense.

 

*Non-high cost serving area deferral account*: On May 30, 2002, and on July 31,2002, the CRTC issued Decision 2002-34 and Decision 2002-43, respectively,pronouncements that affected the Company’s wireline revenues initially for thefour-year periods beginning June 1, 2002, and August 1, 2002,respectively; subsequently the pronouncements were extended by one year. In aneffort to foster competition for residential basic service in non-high costserving areas, the concept of a deferral account mechanism was introduced bythe CRTC, as an alternative to mandating price reductions.

 

Thedeferral account arises from the CRTC requiring the Company to defer thestatement of income recognition of a portion of the monies received in respectof residential basic services provided to non-high cost serving areas. Therevenue deferral was based on the rate of inflation (as measured by achain-weighted Gross Domestic Product Price Index), less a productivity offset,and other exogenous factors that were associated with allowed recoveries inprevious price cap regimes that have now expired. The Company may recognize thedeferred amounts upon the undertaking of qualifying actions, such as Service ImprovementPrograms in qualifying non-high cost serving areas, rate reductions (includingthose provided to competitors as required in Decision 2002-34 and Decision2002-43) and/or rebates to customers. To the extent that a balance remains inthe deferral account, interest expense of the Company is required to be accruedat the Company’s short-term cost of borrowing.

 

****

 

11

----

 

notes to consolidated financialstatements

 

TheCompany has adopted the liability method of accounting for the deferralaccount. This results in the Company recording a liability to the extent thatactivities it has undertaken, realized rate reductions for Competitor Servicesand other future qualifying events do not extinguish the balance of thedeferral account, as further discussed in Note 20(a) and quantifiedin Note 21(b). This also resulted in the Company continuing to recordincremental liability amounts, subject to reductions for the mitigatingactivities, during the Decisions’ initial four-year periods. Other than for theinterest accrued on the balance of the deferral account, which would beincluded in financing costs, substantially all statement of income and othercomprehensive income effects of the deferral account are recorded throughoperating revenues. The CRTC can direct that the Company undertake activitiesdrawing down the deferral account that would not affect the statement of incomeand other comprehensive income; the financial statement impacts of thoseactivities would be contingent on what the CRTC directed.

 

### **(d)**   Cost ofacquisition and advertising costs

### ** **

Costsof acquiring customers, which include the total cost of hardware subsidies,commissions, advertising and promotion related to the initial customeracquisition, are expensed as incurred and are included in the ConsolidatedStatements of Income and Other Comprehensive Income as a component ofOperations expense. Costs of advertising production, airtime and space areexpensed as incurred.

 

### **(e)**   Research anddevelopment

 

Researchand development costs are expensed except in cases where development costs meetcertain identifiable criteria for deferral. Deferred development costs areamortized over the life of the commercial production, or in the case ofserviceable property, plant and equipment, are included in the appropriateproperty group and are depreciated over its estimated useful life.

 

### **(f)**    Depreciationand amortization

 

Assetsare depreciated on a straight-line basis over their estimated useful life asdetermined by a continuing program of studies. Depreciation includesamortization of assets under capital leases and amortization of leaseholdimprovements. Leasehold improvements are normally amortized over the lesser oftheir expected average service life or the term of the lease. Intangible assetswith finite lives (intangible assets subject to amortization) are amortized ona straight-line basis over their estimated lives; estimated lives are reviewedat least annually and are adjusted as appropriate. The continuing program ofasset life studies considers such items as timing of technologicalobsolescence, competitive pressures and future infrastructure utilizationplans; such considerations could also indicate that carrying values of assetsmay not be recoverable. If the carrying values of assets were not consideredrecoverable, an impairment provision (measured at the amount by which thecarrying values of the assets exceed their fair values) would be recorded.

 

Estimateduseful lives for the majority of the Company’s capital assets subject todepreciation and amortization are as follows:

 
| ** **                                                   | ** ** | **Estimated  useful lives****(1)** |
|--------------------------------------------------------------|------------|-----------------------------------------|
| Property,  plant, equipment and other                        |       |                                    |
| Network assets                                               |       |                                    |
| Outside plant                                                |       | 17 to 40 years                          |
| Inside plant                                                 |       | 5 to 15 years                           |
| Wireless site equipment                                      |       | 6.5 to 8 years                          |
| Balance of depreciable property, plant, equipment  and other |       | 4 to 20 years                           |
| Intangible  assets subject to amortization                   |       |                                    |
| Subscriber base                                              |       |                                    |
| Wireline                                                     |       | 40 years                                |
| Wireless                                                     |       | 7 years                                 |
| Software                                                     |       | 3 to 5 years                            |
| Access to rights-of-way and other                            |       | 8 to 30 years                           |

 

----

(1)    Thecomposite depreciation rate for the year ended December 31, 2008, was 5.8% (2007 —6.0%). The rate is calculated by dividing depreciation expense by an averagegross book value of depreciable assets for the reporting period. A result ofthis methodology is that the composite depreciation rate will be lower in aperiod that has a higher proportion of fully depreciated assets remaining inuse.

 

TheCompany chose to depreciate and amortize its assets on a straight-line basis asit believes that this method better reflects the consumption of resourcesrelated to the economic lifespan of the assets than use of an acceleratedmethod and thus is more representative of the economic substance of theunderlying use of the assets.

 

Thecarrying value of intangible assets with indefinite lives, and goodwill, isperiodically tested for impairment using a two-step impairment test. Thefrequency of the impairment test generally is the reciprocal of the stabilityof the relevant 

 

****

 

12

----

 

notes to consolidated financialstatements

 

eventsand circumstances, but intangible assets with indefinite lives and goodwillmust, at a minimum, be tested annually; the Company has selected December asits annual test time. No impairment amounts arose from the December 2008and December 2007 annual tests. The test is applied to each of theCompany’s two reporting units (the reporting units being identified inaccordance with the criteria in the Canadian Institute of Chartered Accountants(CICA) Handbook section for intangible assets and goodwill): Wireline andWireless.

 

TheCompany assesses its goodwill by applying the prescribed method of comparingthe fair value of its reporting units to the carrying amounts of its reportingunits. Consistent with current industry-specific valuation methods, acombination of the discounted cash flow approach, the market comparableapproach and analytical review of industry and Company-specific facts is usedin determining the fair value of the Company’s reporting units.

 

### **(g)**   Translationof foreign currencies

 

Tradetransactions completed in foreign currencies are translated into Canadiandollars at the rates prevailing at the time of the transactions. Monetaryassets and liabilities denominated in foreign currencies are translated intoCanadian dollars at the rate of exchange in effect at the statement offinancial position date with any resulting gain or loss being included in theConsolidated Statements of Income and Other Comprehensive Income as Financingcosts, as set out in Note 8. Hedge accounting is applied in specific instancesas further discussed in Note 1(i).

 

TheCompany has minor foreign subsidiaries that are considered to beself-sustaining. Accordingly, foreign exchange gains and losses arising fromthe translation of the minor foreign subsidiaries’ accounts into Canadiandollars are reported as a component of other comprehensive income, as set outin Note 19(c).

 

### **(h)**   Financialinstruments — recognition and measurement

 

Inrespect of the recognition and measurement of financial instruments, theCompany has adopted the following policies:

 
| **Financial instrument**                                                                                                | ** ** | **Classified as  available-for-sale  or held as part of  a cash flow  hedging  relationship****(1)** | ** ** | **Classified as  held for  trading****(1) (2)** | ** ** | **Company’s reason for classification selection**                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   Short-term marketable security investments(3)                                                             |       |                                                                                                                                    |       | X                                                              |       | ·   The Company has selected this method as it better reflects management’s  investment intentions                                                             |
| ·   Long-term investments not subject to  significant influence of the Company(3)                             |       | X                                                                                                                                       |       |                                                           |       | ·   The Company has selected classification as  available-for-sale as it better  reflects management’s investment intentions                                   |
| ·   Stand-alone derivatives which are a part of  an established and documented cash flow hedging relationship |       | X                                                                                                                                       |       |                                                           |       | ·   The Company believes that classification as  held for hedging results in a better matching of the change in the fair value  with the risk exposure being hedged |

 

----

(1)   The distinction between classification asavailable-for-sale (or held as part of a cash flow hedging relationship) orheld for trading is that *unrealized*changes in the fair values of financial instruments classified asavailable-for-sale, or the effective portion of *unrealized*changesin the fair values of financial instruments held for hedging, are included inother comprehensive income and *unrealized*changes in the fair values of financial instruments classified as held fortrading are included in net income.

(2)   Certain financial instruments that are notrequired to be classified as held for trading may be classified as held for tradingif the Company so chooses.

(3)   In respect of investments in securities forwhich the fair values can be reliably measured, the Company determines theclassification on an instrument-by-instrument basis at time of initialrecognition.

 
| · | Accounts  receivable that are available-for-sale to an arm’s-length securitization  trust are accounted for as loans and receivables. The Company has selected  this method as the benefits that would have been expected to arise from using  the available-for-sale method were not expected to exceed the costs of  selecting and implementing that method.                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Regular-way  purchases or sales (those which require actual delivery of financial assets  or financial liabilities) are recognized on the trade date. The Company has  selected this method as it is consistent with the mandatory trade-date  accounting required for derivative instruments.                                                                                                           |
| · | Transaction  costs, other than in respect of held for trading items, are added to the  initial fair value of the acquired financial asset or financial liability.  The Company has selected this method as it believes that this results in a  better matching of the transaction costs with the periods benefiting from the  transaction costs.                                                         |
| · | In  respect of hedges of anticipated transactions, which in the Company’s  specific instance currently relates to inventory purchase commitments, hedge  gains/losses will be included in the cost of the inventory and will be  expensed when the inventory is sold. The Company has selected this method as  it believes that a better matching with the risk exposure being hedged is  achieved. |

 

****

 

13

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notes to consolidated financialstatements

 

### **(i)**    Hedgeaccounting

### ** **

*General:* The Company applies hedge accounting to the financial instruments usedto:

 
| · | establish  designated currency hedging relationships for its U.S. Dollar  denominated long-term debt future cash outflows (semi-annual interest  payments and principal payments at maturity), as set out in Note 5 and  further discussed in Note 18(b); |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| · | establish  designated currency hedging relationships for certain U.S. Dollar  denominated future purchase commitments, as set out in Note 5; and                                                                                                               |
|   |                                                                                                                                                                                                                                                                |
| · | fix  the compensation cost arising from specific grants of restricted stock units,  as set out in Note 5 and further discussed in Note 12(c).                                                                                                             |

 

*Hedge accounting:* The purpose of hedge accounting, in respectof the Company’s designated hedging relationships, is to ensure thatcounterbalancing gains and losses are recognized in the same periods. TheCompany chose to apply hedge accounting, as it believes this is morerepresentative of the economic substance of the underlying transactions.

 

Inorder to apply hedge accounting, a high correlation (which indicateseffectiveness) is required in the offsetting changes in the values of thefinancial instruments (the hedging items) used to establish the designatedhedging relationships and all, or a part, of the asset, liability ortransaction having an identified risk exposure that the Company has taken stepsto modify (the hedged items). The Company assesses the anticipatedeffectiveness of designated hedging relationships at inception and for eachreporting period thereafter. A designated hedging relationship is consideredeffective by the Company if the following critical terms match between thehedging item and the hedged item: the notional amount of the hedging item andthe principal of the hedged item; maturity dates; payment dates; and interestrate index (if, and as, applicable). As set out in Note 5(i), anyineffectiveness, such as from a difference between the notional amount of thehedging item and the principal of the hedged item, or if a previously effectivedesignated hedging relationship becomes ineffective, is reflected in theConsolidated Statements of Income and Other Comprehensive Income as Financingcosts if in respect of long-term debt and as Operations expense if in respectof U.S. Dollar denominated future purchase commitments or share-basedcompensation.

 

*Hedging assets and liabilities:* In the application of hedge accounting, anamount (the hedge value) is recorded on the Consolidated Statements ofFinancial Position in respect of the fair value of the hedging items. The netdifference, if any, between the amounts recognized in the determination of netincome and the amount necessary to reflect the fair value of the designatedcash flow hedging items on the Consolidated Statements of Financial Position iseffectively recognized as a component of other comprehensive income, as set outin Note 19(c).

 

Inthe application of hedge accounting to U.S. Dollar denominated long-termdebt future cash outflows, the amount recognized in the determination of netincome is the amount that counterbalances the difference between the Canadiandollar equivalent of the value of the hedged items at the rate of exchange atthe statement of financial position date and the Canadian dollar equivalent ofthe value of the hedged items at the rate of exchange in the hedging items.

 

Inthe application of hedge accounting to the compensation cost arising fromshare-based compensation, the amount recognized in the determination of netincome is the amount that counterbalances the difference between the quotedmarket price of the Company’s Non-Voting Shares at the statement of financialposition date and the price of the Company’s Non-Voting Shares in the hedgingitems.

 

### **(j)**    Income taxes

### ** **

TheCompany follows the liability method of accounting for income taxes. Under thismethod, current income taxes are recognized for the estimated income taxespayable for the current year. Future income tax assets and liabilities arerecognized for temporary differences between the tax and accounting bases ofassets and liabilities as well as for the benefit of losses available to be carriedforward to future years for tax purposes that are more likely than not to berealized. The amounts recognized in respect of future income tax assets andliabilities are based upon the expected timing of the reversal of temporarydifferences or usage of tax losses and application of the substantively enactedtax rates at the time of reversal or usage.

 

Theoperations of the Company are complex and the related tax interpretations,regulations and legislation are continually changing. As a result, there areusually some tax matters in question that result in uncertain tax positions.The Company only recognizes the income tax benefit of an uncertain tax positionwhen it is more likely than not that the ultimate determination of the taxtreatment of the position will result in that benefit being realized. TheCompany accrues for interest charges on current tax liabilities that have notbeen funded, which would include interest and penalties arising from uncertaintax positions. The Company includes such charges as a component of Financingcosts.

 

TheCompany’s research and development activities may be eligible to earnInvestment Tax Credits; the determination of eligibility is a complex matter.The Company only recognizes the Investment Tax Credits when there is reasonableassurance that the ultimate determination of the eligibility of the Company’sresearch and development 

 

****

 

14

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notes to consolidated financialstatements

 

activitieswill result in the Investment Tax Credits being received. When there isreasonable assurance that the Investment Tax Credits will be received, they areaccounted for using the cost reduction method whereby such credits are deductedfrom the expenditures or assets to which they relate, as set out in Note 9.

 

### **(k)**   Share-basedcompensation

### ** **

Canadian GAAP requires, for share option awards grantedafter 2001, that a fair value be determined for share option awards at the dateof grant and that such fair value be recognized in the financial statements.Proceeds arising from the exercise of share option awards are credited to sharecapital, as are the recognized fair values of the exercised share optionawards.

 

Share option awards which have a net-equity settlementfeature, as set out in Note 12(b), and which do *not*also have a net-cash settlement feature, are accounted for as equityinstruments. The Company has selected the equity instrument fair value methodof accounting for the net-equity settlement feature so as to align with the accountingtreatment afforded to the associated share option awards.

 

Share option awards which have a net-cash settlementfeature, as set out in Note 12(b), are accounted for as liabilityinstruments. If share option awards which have the net-cash settlement featureand which were granted subsequent to 2001 are settled using other than thenet-cash settlement feature, they would revert to be being accounted for asequity instruments.

 

In respect of restricted stock units, as set out inNote 12(c), the Company accrues a liability equal to the product of thevesting restricted stock units multiplied by the fair market value of thecorresponding shares at the end of the reporting period (unless hedgeaccounting is applied, as set out in Note 1(i)). The expense for restricted stock units that donot ultimately vest is reversed against the expense that had been previouslyrecorded in their respect.

 

When share-based compensation vests in one amount at afuture point in time (cliff vesting), the expense is recognized by the Companyin the Consolidated Statements of Income and Other Comprehensive Income on astraight-line basis over the vesting period. When share-based compensationvests in tranches (graded vesting), the expense is recognized by the Company inthe Consolidated Statements of Income and Other Comprehensive Income using theaccelerated expense attribution method.

 

### **(l)**    Employee future benefit plans

### ** **

The Company accrues for its obligations under employeedefined benefit plans, and the related costs, net of plan assets. The cost ofpensions and other retirement benefits earned by employees is actuariallydetermined using the projected benefit method pro-rated on service andmanagement’s best estimate of expected plan investment performance, salaryescalation and retirement ages of employees.  For thepurpose of calculating the expected return on plan assets, those assets arevalued at fair value.  The excess ofthe net actuarial gain (loss) over 10% of the greater of the accrued benefitobligation and the fair value of the plan assets is amortized over the expectedaverage remaining service period of active employees of the plan, as are pastservice costs and transitional assets and liabilities.

 

The Company uses defined contribution accounting for theTelecommunication Workers Pension Plan and the British Columbia Public ServicePension Plan that cover certain of the Company’s employees.

 

### **(m)**  Cash andtemporary investments, net

### ** **

Cashand temporary investments, which may include investments in money marketinstruments that are purchased three months or less from maturity, arepresented net of outstanding items including cheques written but not cleared bythe bank as at the statement of financial position date. Cash and temporaryinvestments, net, are classified as a liability on the statement of financialposition when the amount of the cheques written but not cleared by the bankexceeds the amount of the cash and temporary investments. When cash andtemporary investments, net, are classified as a liability, they may alsoinclude overdraft amounts drawn on the Company’s bilateral bank facilities,which revolve daily and are discussed further in Note 17.

 

### **(n)**   Sales ofreceivables

### ** **

Transfers of receivables in securitization transactionsare recognized as sales when the Company is deemed to have surrendered controlover the transferred receivables and consideration, other than for itsbeneficial interests in the transferred receivables, has been received. Whenthe Company sells its receivables, it retains reserve accounts, which areretained interests in the securitized receivables, and servicing rights. When atransfer is considered a sale, the Company derecognizes all receivables sold,recognizes at fair value the assets received and the liabilities incurred andrecords the gain or loss on sale in the Consolidated Statements of Income andOther Comprehensive Income as Other expense, net. The amount of gain or lossrecognized on the sale of receivables depends in part on the previous carryingamount of the receivables involved in the transfer, allocated between thereceivables sold and the retained interests based upon their relative fairmarket value at the sale date. The Company estimates the fair value for itsretained interests based on the present value of future expected cash 

 

****

 

15

----

 

notes to consolidated financialstatements

 

flows using management’s best estimates of the keyassumptions (credit losses, the weighted average life of the receivables soldand discount rates commensurate with the risks involved).

 

### **(o)**   Inventories

### ** **

The Company’s inventory consists primarily ofwireless handsets, parts and accessories and communications equipment held forresale. Inventories are valued at the lower of cost and net realizable value,with cost being determined on an average cost basis. Previous write-downs tonet realizable value are reversed if there is a subsequent increase in thevalue of the related inventories. See Note 2(c) and Note 21(b).

 

### **(p)**   Capitalassets

### ** **

*General*: Capital assets are recorded at historical cost and, with respect toself-constructed property, plant, equipment and other, include materials,direct labour and applicable overhead costs. With respect to internally developed,internal-use software, recorded historical costs include materials, directlabour and direct labour-related costs. Where property, plant, equipment andother construction projects exceed $50 million and are of a sufficientlylong duration (generally, longer than twelve months), an amount is capitalizedfor the cost of funds used to finance construction. The rate for calculatingthe capitalized financing costs is based on the Company’s one-year cost ofborrowing.

 

When property, plantand/or equipment are sold by the Company, the historical cost less accumulateddepreciation is netted against the sale proceeds and the difference is includedin the Consolidated Statements of Income and Other Comprehensive Income asOther expense, net.

 

*Assetretirement obligations*: Liabilities are recognized for statutory, contractual orlegal obligations, normally when incurred, associated with the retirement ofproperty, plant and equipment (primarily certain items of outside plant andwireless site equipment) when those obligations result from the acquisition,construction, development and/or normal operation of the assets. Theobligations are measured initially at fair value, determined using presentvalue methodology, and the resulting costs are capitalized into the carryingamount of the related asset. In subsequent periods, the liability is adjustedfor the accretion of discount and any changes in the amount or timing of theunderlying future cash flows. The capitalized asset retirement cost isdepreciated on the same basis as the related asset and the discount accretionis included in determining the results of operations.

 

### **(q)**   Leases

### ** **

Leasesare classified as capital or operating depending upon the terms and conditionsof the contracts.

 

Wherethe Company is the lessee, asset values recorded under capital leases areamortized on a straight-line basis over the period of expected use. Obligationsrecorded under capital leases are reduced by lease payments net of imputedinterest.

 

Forthe year ended December 31, 2008, real estate and vehicle operating leaseexpenses, which are net of the amortization of the deferred gain on thesale-leaseback of buildings, were $225 million (2007 — $211 million).The unamortized balances of the deferred gains on the sale-leaseback ofbuildings are set out in Note 21(b).

 

### **(r)**   Investments

### ** **

TheCompany accounts for its investments in companies over which it has significantinfluence using the equity basis of accounting whereby the investments areinitially recorded at cost and subsequently adjusted to recognize the Company’sshare of earnings or losses of the investee companies and reduced by dividendsreceived. The excess of the cost of equity investments over the underlying bookvalue at the date of acquisition, except for goodwill, is amortized over theestimated useful lives of the underlying assets to which it is attributed.

 

The Company accounts for its other investments as available-for-sale attheir fair values unless the investment securities do not have quoted marketprices in an active market, in which case the Company uses the cost basis ofaccounting whereby investments are initially recorded at cost and earnings fromsuch investments are recognized only to the extent received or receivable. Thecost of investments sold or amounts reclassified out of other comprehensive incomeinto earnings are determined on a specific identification basis.

 

Unless there is an other than temporary decline in the value of anavailable-for-sale investment, carrying values for available-for-saleinvestments are adjusted to estimated fair values with such adjustment beingincluded in the Consolidated Statements of Income and Other ComprehensiveIncome as a component of other comprehensive income. When there is an otherthan temporary decline in the value of the investment, the carrying values ofinvestments accounted for using the equity, available-for-sale and cost methodsare reduced to estimated fair values with such reduction being included in theConsolidated Statements of Income and Other Comprehensive Income as Otherexpense, net.

 

### **(s)**   Comparative amounts

### ** **

Certainof the comparative amounts have been reclassified to conform to thepresentation adopted currently.

 

****

 

16

----

 

notes to consolidated financialstatements

 

## 2      accounting policy developments

##  

### **(a)**   Convergencewith International Financial Reporting Standards as issued by the InternationalAccounting Standards Board

### ** **

In 2006, Canada’s Accounting Standards Board ratified a strategic planthat will result in Canadian GAAP, as used by publicly accountable enterprises,being fully converged with International Financial Reporting Standards asissued by the International Accounting Standards Board (IFRS-IASB) over atransitional period to be complete by 2011. The Company will be required toreport using the converged standards effective for interim and annual financialstatements relating to fiscal years beginning no later than on or after January 1,2011, the date which the Company has selected for adoption.

 

Canadian GAAP will be fully converged with IFRS-IASB through acombination of two methods: as current joint-convergence projects of the UnitedStates’ Financial Accounting Standards Board and the International AccountingStandards Board are agreed upon, they will be adopted by Canada’s AccountingStandards Board and may be introduced in Canada before the publicly accountableenterprises’ transition date to IFRS-IASB; and standards not subject to ajoint-convergence project have been exposed in an omnibus manner forintroduction at the time of the publicly accountable enterprises’ transitiondate to IFRS-IASB. As illustrated in Note 2(b)-(e), the first convergencemethod may, or will, result in the Company either having the option to, orbeing required to, effectively, changeover certain accounting policies toIFRS-IASB prior to 2011. As discussed further in Note 22(g), the United States’Financial Accounting Standards Board and the International Accounting StandardsBoard have completed a joint-project on business combinations andnon-controlling interests.

 

The International Accounting Standards Board’s work plan currently, andexpectedly, has projects underway that are expected to result in newpronouncements that continue to evolve IFRS-IASB, and, as a result IFRS-IASB asat the transition date is expected to differ from its current form.

 

 In November 2008, theUnited States Securities and Exchange Commission issued a proposed “road map”,with seven milestones, that would permit certain United States reportingissuers to use IFRS-IASB in their filings. This proposal is a significantdevelopment as it also contemplates mandatory usage of IFRS-IASB by UnitedStates reporting issuers as early as 2014 (such a mandatory usage decision —Milestone 6 — is anticipated to be made by the United States Securitiesand Exchange Commission in 2011). It is not possible to currently assess theimpact, if any, this proposal will have on the International AccountingStandards Board’s work plan; however, Milestone 1 is a requirement forimprovements in accounting standards and a subsequent consideration by theUnited States Securities and Exchange Commission of whether IFRS-IASB are ofhigh quality and sufficiently comprehensive.

 

The Company is in the process of assessing the impacts on itself of theCanadian convergence initiative. There are several phases that the Company willhave to complete on the path to changing over to IFRS-IASB:

 

·    Theinitial impact assessment and scoping phase includes the identification ofsignificant differences between existing Canadian GAAP and IFRS-IASB asrelevant to the Company’s specific instance.

 

·    Thefollowing key elements phase includes the identification, evaluation andselection of the accounting policies necessary for the Company to changeover toIFRS-IASB. As well, this phase includes other operational elements such asinformation technology, internal control over financial reporting and training.

 

·    Thesubsequent embedding phase will integrate the solutions into the Company’sunderlying financial system and processes that are necessary for the Company tochangeover to IFRS-IASB.

 

The Company is required to qualitatively disclose its changeoverimpacts in conjunction with its 2008 and 2009 financial reporting. Asactivities progress through 2010, the specificity of the disclosure of pre- andpost-IFRS-IASB changeover accounting policy differences is expected toincrease.

 

In its 2010 fiscal year, the fiscal year immediately prior to the onein which it commences reporting under IFRS-IASB, the Company will, effectively,have to maintain two parallel books of account: one set of books of accountwill be prepared using the contemporary version of Canadian GAAP and would beused for contemporaneous reporting; one set of books of account will beprepared using the contemporary version of IFRS-IASB and would be used forreporting of comparative amounts during the Company’s 2011 fiscal year.

 

*Initial impact assessment and scoping phase —status*: Based upon the then current state ofIFRS-IASB, in the first quarter of 2008 this phase utilized a diagnosticprocess and identified a modest number of topics possibly impacting either theCompany’s financial results and/or the Company’s effort necessary to changeoverto IFRS-IASB. The IASB has activities currently underway which may, or will, changeIFRS-IASB and such change may, or will, impact the Company; the Company willassess any such change as a component of its key elements phase.

 

*Key elements phase — status*:Currently underway are the identification, evaluation and selection of the accountingpolicies necessary for the Company to changeover to IFRS-IASB; consideration ofimpacts on operational elements such 

 

****

 

17

----

 

notes to consolidated financialstatements

 

as information technology and internal control over financial reportingare integral to this process. Targeted training activities, which leveragedboth internal and external resources, occurred during the current reportingperiod.

 

Although its impact assessment activities are well underway andprogressing ahead of plan, continued progress is necessary before the Companycan prudently increase the specificity of the disclosure of pre- andpost-IFRS-IASB changeover accounting policy differences, other than as set outin Note 2(b)-(e).

 

### **(b)**   Financialinstruments — disclosure; presentation

### ** **

Asan activity consistent with Canadian GAAP being converged with IFRS-IASB, the previously existing recommendations forfinancial instrument *disclosure* werereplaced with new recommendations (CICA Handbook Section 3862); theexisting recommendations for financial instrument *presentation*were carried forward, unchanged (as CICA Handbook Section 3863).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA forfinancial instrument disclosures apply to the Company. As set out inNote 5, the new recommendations result in incremental disclosures,relative to those previously required, with an emphasis on risks associatedwith both recognized and unrecognized financial instruments to which an entityis exposed during the period and at the statement of financial position date,and how an entity manages those risks. The transitional provisions provide thatcertain of the incremental disclosures need not be provided on a comparative basisin the year of adoption.

 

### **(c)**   Inventories

### ** **

Asan activity consistent with Canadian GAAP being converged with IFRS-IASB, the previously existing recommendations foraccounting for inventories were replaced with new recommendations (CICAHandbook Section 3031).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA foraccounting for inventories apply to the Company. The new recommendationsprovide more guidance on the measurement and disclosure requirements forinventories; significantly, the new recommendations allow the reversals ofprevious write-downs to net realizable value where there is a subsequentincrease in the value of inventories. The Company’s results of operations andfinancial position were not materially affected by the new recommendations.

 

### **(d)**   Goodwill andintangible assets

### ** **

Asan activity consistent with Canadian GAAP being converged with IFRS-IASB, the previously existing recommendations forgoodwill and intangible assets and research and development costs were replacedwith new recommendations (CICA Handbook Section 3064).

 

Commencingwith the Company’s 2009 fiscal year, the new recommendations of the CICA forgoodwill and intangible assets will apply to the Company. The newrecommendations provide extensive guidance on when expenditures qualify forrecognition as intangible assets. The Company’s results of operations andfinancial position are not expected to be materially affected by the newrecommendations.

 

### **(e)**   Businesscombinations and non-controlling interests

### ** **

Asan activity consistent with Canadian GAAP being converged with IFRS-IASB, the previously existing recommendations forbusiness combinations and consolidation financial statements will be replacedwith new recommendations for business combinations (CICA Handbook Section 1582),consolidations (CICA Handbook Section 1601) and non-controlling interestsCICA Handbook Section 1602).

 

Generally,the new recommendations result in measuring business acquisitions at the fairvalue of the acquired business and a prospectively applied shift from a parentcompany conceptual view of consolidation theory (which results in the parentcompany recording book values attributable to non-controlling interests) to anentity conceptual view (which results in the parent company recording fairvalues attributable to non-controlling interests). Unlike the corresponding newU.S. GAAP (see Note 22(g)), which requires the recognition of the fairvalue of goodwill attributable to non-controlling interests, both the newCanadian GAAP recommendations and IFRS-IASB allow the choice of whether or notto recognize the fair value of goodwill attributable to non-controllinginterests on an acquisition-by-acquisition basis.

 

Measuringbusiness acquisitions at fair value will, among other things, result in:

 
| · | acquisition  costs being expensed;                                                                                                                                                                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                              |
| · | acquisition-created  restructuring costs being expensed;                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                              |
| · | contingent  consideration, which is accounted for as a financial liability, being  measured at fair value at the time of the acquisition with subsequent changes  in its fair value being included in determining the results of operations;  and |
|   |                                                                                                                                                                                                                                              |
| · | changes  in non-controlling ownership interests subsequent to the parent company’s  acquisition of control, and not resulting in the parent company’s loss of  control, being accounted for as capital transactions.                    |

 

****

 

18

----

 

notes to consolidated financialstatements

 

EffectiveJanuary 1, 2009, the Company early adopted the new recommendations and didso in accordance with the transitional provisions; the Company would otherwisehave been required to adopt the new recommendations effective January 1,2011.

 

Whetherthe Company will be materially affected by the new recommendations will dependupon the specific facts of business combinations, if any, occurring subsequentto the Company’s adoption of the new recommendations. The Company’sconsolidated financial statements will, however, be subject to a small numberof retrospectively applied non-controlling interest-related presentation anddisclosure changes:

 

·    the Consolidated Statements of FinancialPosition will recognize non-controlling interest as a separate component ofshareholders’ equity (December 31, 2008, shareholders’ equity to bereported post-adoption would be $7,205 million); and

 

·    the Consolidated Statements of Income andOther Comprehensive Income will present the allocation of net income and othercomprehensive income between the Company’s shareholders and non-controllinginterests rather than reflecting the non-controlling interest in the results ofoperations as a deduction in arriving at net income and other comprehensiveincome.

 

Hadthese presentation and disclosure changes been applied to the ConsolidatedStatements of Income and Other Comprehensive Income for the years ended December 31,2008 and 2007, the result would be as follows:

 
| ** **                                                                                                                    | ** ** | **2008**                        | ** ** | **2007**                                    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| **Years ended December 31 (millions except per share amounts)**                       | ** ** | **As currently  reported** | ** ** | **To be reported  post-adoption** | ** ** | **As currently  reported** | ** ** | **To be reported  post-adoption** | ** ** |
| Operating revenues                                                                                                            |       | $                               | 9,653      |                                        | $          | 9,653 |   | $ | 9,074 |   | $ | 9,074 |   |
| Operating  expenses                                                                                                           |       |                            |       |                                        |       |   |   |   |   |
| Operations                                                                                                                    |       | 5,815                           |       | 5,815                                       |       | 5,465 |   | 5,465 |   |
| Restructuring  costs                                                                                                          |       | 59                              |       | 59                                          |       | 20 |   | 20 |   |
| Depreciation                                                                                                                  |       | 1,384                           |       | 1,384                                       |       | 1,355 |   | 1,355 |   |
| Amortization  of intangible assets                                                                                            |       | 329                             |       | 329                                         |       | 260 |   | 260 |   |
|                                                                                                                          |       | 7,587                           |       | 7,587                                       |       | 7,100 |   | 7,100 |   |
| Operating  income                                                                                                             |       | 2,066                           |       | 2,066                                       |       | 1,974 |   | 1,974 |   |
| Other  expense, net                                                                                                           |       | 36                              |       | 36                                          |       | 36 |   | 36 |   |
| Financing  costs                                                                                                              |       | 463                             |       | 463                                         |       | 440 |   | 440 |   |
| Income  before income taxes (and non-controlling interests)(1)                                                                |       | 1,567                           |       | 1,567                                       |       | 1,498 |   | 1,498 |   |
| Income taxes                                                                                                                  |       | 436                             |       | 436                                         |       | 233 |   | 233 |   |
| (Non-controlling  interests)(1)                                                                                               |       | 3                               |       | N/A                                         |       | 7 |   | N/A |   |
| Net income  (and Common Share and Non-Voting Income)(1)                                                                       |       | 1,128                           |       | 1,131                                       |       | 1,258 |   | 1,265 |   |
| Other Comprehensive Income                                                                                                    |       |                            |       |                                        |       |   |   |   |   |
| Change in unrealized fair value of  derivatives designated as cash flow hedges                                                |       | (26                             | )          | (26                                         | )          | 82 |   | 82 |   |
| Foreign currency translation adjustment  arising from translating financial statements of self-sustaining foreign  operations |       | 2                               |       | 2                                           |       | (7 | ) | (7 | ) |
| Change in unrealized fair value of  available-for-sale financial assets                                                       |       | (2                              | )          | (2                                          | )          | (1 | ) | (1 | ) |
|                                                                                                                          |       | (26                             | )          | (26                                         | )          | 74 |   | 74 |   |
| Comprehensive  Income                                                                                                         |       | $                               | 1,102      |                                        | $          | 1,105 |   | $ | 1,332 |   | $ | 1,339 |   |
| Net income attributable to:                                                                                                   |       |                            |       |                                        |       |   |   |   |   |
| Common Shares and Non-Voting Shares                                                                                           |       |                            |       | $                                           | 1,128      |   |   |   | $ | 1,258 |   |
| Non-controlling interests                                                                                                     |       |                            |       | 3                                           |       |   |   | 7 |   |
|                                                                                                                          |       |                            |       | $                                           | 1,131      |   |   |   | $ | 1,265 |   |
| Total comprehensive income attributable to:                                                                                   |       |                            |       |                                        |       |   |   |   |   |
| Common Shares and Non-Voting Shares                                                                                           |       |                            |       | $                                           | 1,102      |   |   |   | $ | 1,332 |   |
| Non-controlling interests                                                                                                     |       |                            |       | 3                                           |       |   |   | 7 |   |
|                                                                                                                          |       |                            |       | $                                           | 1,105      |   |   |   | $ | 1,339 |   |
| Net income per Common Share and Non-Voting  Share                                                                             |       |                            |       |                                        |       |   |   |   |   |
| - Basic                                                                                                                       |       | $                               | 3.52       |                                        | $          | 3.52 |   | $ | 3.79 |   | $ | 3.79 |   |
| - Diluted                                                                                                                     |       | $                               | 3.51       |                                        | $          | 3.51 |   | $ | 3.76 |   | $ | 3.76 |   |

 

----

(1)    Captioning in parentheses will be deletedpost-adoption.

 

****

 

19

----

 

notes to consolidated financialstatements

 

## 3      capital structure financial policies

##  

The Company’s objectives when managing capital are: (i) tomaintain a flexible capital structure which optimizes the cost of capital atacceptable risk; and (ii) to manage capital in a manner which balances theinterests of equity and debt holders.

 

In the management of capital, the Company includes shareholders’ equity(excluding accumulated other comprehensive income), long-term debt (includingany associated hedging assets or liabilities, net of amounts recognized inaccumulated other comprehensive income), cash and temporary investments andsecuritized accounts receivable in the definition of capital.

 

The Company manages the capital structure and makes adjustments to itin the light of changes in economic conditions and the risk characteristics ofthe underlying assets. In order to maintain or adjust the capital structure,the Company may adjust the amount of dividends paid to shareholders, purchaseshares for cancellation pursuant to normal course issuer bids, issue newshares, issue new debt, issue new debt to replace existing debt with differentcharacteristics and/or increase or decrease the amount of sales of tradereceivables to an arm’s-length securitization trust.

 

The Company monitors capital on a number of bases, including: net debtto Earnings Before Interest, Taxes, Depreciation and Amortization — excludingrestructuring costs (EBITDA — excluding restructuring costs); and dividendpayout ratio of sustainable net earnings.

 

Net debt to EBITDA — excluding restructuring costs is calculated as netdebt at the end of the period divided by twelve-month trailing EBITDA —excluding restructuring costs. Net debt is a measure that does not have anystandardized meaning prescribed by GAAP and is therefore unlikely to becomparable to similar measures presented by other issuers; the calculation ofnet debt is as set out in the following schedule. Net debt is one component ofa ratio used to determine compliance with debt covenants. The calculation ofEBITDA — excluding restructuring costs is a measure that does not have anystandardized meaning prescribed by GAAP and is therefore unlikely to becomparable to similar measures presented by other issuers; the calculation ofEBITDA — excluding restructuring costs is as set out in the following schedule.This measure, historically, is substantially the same as the leverage ratiocovenant in the Company’s credit facilities.

 

Dividend payout ratio of sustainable net earnings is calculated as themost recent quarterly dividend declared per share multiplied by four anddivided by basic earnings per share for the twelve-month trailing periodexcluding tax-related adjustments and the statement of income and othercomprehensive income impacts of the share options with the net-cash settlementfeature, which are discussed further in Note 12(b).

 

During 2008, the Company’s strategy, which was unchanged from 2007, wasto maintain the financial policies and guidelines set out in the followingschedule. The Company believes that these financial policies and guidelines,which are reviewed annually, are currently at the optimal level and, bymaintaining credit ratings in the range of BBB+ to A-, or the equivalent,provide reasonable access to capital.

 
| **As at, or twelve-month periods ended, December 31 ($ in millions)** | ** ** | **Policies and  guidelines** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------|------------|------------|------------|
| Components of debt and coverage ratios                                                                                  |       |                              |       |     | ** ** |       |       |
| Net debt(1)                                                                                                             | ** ** | ** **                        |       | **$**    | **7,286**  | ** ** | $          | 6,141 |   |
| EBITDA – excluding restructuring costs(2)                                                                          | ** ** | ** **                        |       | **$**    | **3,838**  | ** ** | $          | 3,609 |   |
| Net interest cost(3)                                                                                                    | ** ** | ** **                        |       | **$**    | **463**    | ** ** | $          | 440 |   |
| Debt ratio                                                                                                              |       |                              |       |     | ** ** |       |       |
| Net debt to EBITDA – excluding  restructuring costs                                                                |       | 1.5 – 2.0                    | ** ** | **1.9**  | ** ** | 1.7        |       |
| Coverage ratios                                                                                                         |       |                              |       |     | ** ** |       |       |
| Interest coverage on long-term debt(4)                                                                                  | ** ** | ** **                        |       | **4.3**  | ** ** | 4.2        |       |
| EBITDA – excluding restructuring costs  interest coverage(5)                                                       | ** ** | ** **                        |       | **8.3**  | ** ** | 8.2        |       |
| Other measure                                                                                                           |       |                              |       |     | ** ** |       |       |
| Dividend payout ratio of sustainable net  earnings                                                                      |       | 45 – 55%                     | ** ** | **54**   | **%**      | 47         | %          |

 

----

(1)    Net debt is calculated as follows:

 
| ** **                                                                                                                                                                                                | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Long-term debt (Note 18)                                                                                                                                                                                  | ** ** | **$**    | **6,352**  | ** ** | $          | 4,589 |   |
| Debt issuance costs netted against long-term  debt                                                                                                                                                        | ** ** | **28**   | ** ** | 30         |       |
| Derivative liabilities, net                                                                                                                                                                               | ** ** | **778**  | ** ** | 1,179      |       |
| Accumulated other comprehensive income  amounts arising from financial instruments used to manage interest rate and  currency risks associated with U.S. Dollar denominated debt (excluding tax  effects) | ** ** | **(168** | **)**      | (137       | )          |
| Cash and temporary investments, net                                                                                                                                                                       | ** ** | **(4**   | **)**      | (20        | )          |
| Cumulative proceeds from accounts  receivable securitization (Note 14)                                                                                                                                    | ** ** | **300**  | ** ** | 500        |       |
| Net debt                                                                                                                                                                                                  | ** ** | **$**    | **7,286**  | ** ** | $          | 6,141 |   |

 

****

 

20

----

 

notes to consolidated financialstatements

 

(2)    EBITDA – excluding restructuringcosts is calculated as follows:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| EBITDA (Note 6)                             | ** ** | **$**    | **3,779**  |     | $          | 3,589 |   |
| Restructuring costs (Note 7)                | ** ** | **59**   |       | 20       |       |
| EBITDA – excluding restructuring costs | ** ** | **$**    | **3,838**  |     | $          | 3,609 |   |

 

(3)    Net interest cost is defined as financingcosts before gains on redemption and repayment of debt, calculated on atwelve-month trailing basis (losses recorded on the redemption of long-termdebt, if any, are included in net interest cost).

(4)    Interest coverage on long-term debt is definedas net income before interest expense on long-term debt and income tax expense,divided by interest expense on long-term debt (including losses recorded on theredemption of long-term debt, if any).

(5)    EBITDA – excluding restructuringcosts interest coverage is defined as EBITDA – excluding restructuringcosts divided by net interest cost. This measure is substantially the same asthe coverage ratio covenant in the Company’s credit facilities.

 

The net debt to EBITDA — excluding restructuring costs ratio increased0.2 as increased net debt was partly offset by increased twelve-month trailingEBITDA — excluding restructuring costs (the net increase in debt supportedpayment of $882 million for advanced wireless services spectrum licencesand $692 million (net of acquired cash) for January 2008acquisitions, as discussed further in Note 16(b)). When compared to one yearearlier, the interest coverage on long-term debt had an increase of 0.1 as aresult of a 0.2 increase due to higher income before income taxes and interestexpense and a 0.1 decrease due to higher interest expense. The EBITDA —excluding restructuring costs interest coverage ratio had an increase of 0.1 asa result of a 0.5 increase due to higher EBITDA — excluding restructuring costsand a 0.4 decrease due to higher net interest costs.

 

## 4      regulation of rates charged to customers

##  

### **(a)**   General

 

Theprovision of telecommunications services by the Company through TELUSCommunications Company partnership and the TELE-MOBILE COMPANY partnership issubject to regulation under provisions of the *TelecommunicationsAct*. The regulatory authority designated to implement the *Telecommunications Act* is the CRTC, whichis established pursuant to the terms of the *CanadianRadio-television and Telecommunications Act*.

 

Pursuant to Part III of the *Telecommunications Act*, the CRTC mayforbear, conditionally or unconditionally, from regulating the rates forcertain telecommunications services, or certain classes of telecommunicationsservice providers, where the CRTC finds that the service or class of serviceprovided by the telecommunications service provider is subject to competitionsufficient to protect the interests of customers. TELUS Communications Companypartnership has, for example, been granted forbearance from regulation inrelation to its entire portfolio of wireless and paging services. In the latterhalf of 2007, TELUS Communications Company partnership was granted forbearancein relation to the setting of rates for a number of its wirelinetelecommunications services that are currently provided within 96 residentialand 47 business exchanges where it was determined that there was significantcompetition for such services to protect the interests of customers. Previouslyforborne services, including interexchange voice services, wide area networkservices and retail Internet services, remain forborne. TELUS CommunicationsCompany partnership also operates as a forborne telecommunications serviceprovider when it provides telecommunications services (primarily business localexchange service) outside of its traditional incumbent serving territory(Alberta, British Columbia and parts of Quebec) and, as such, all of itsservices are not subject to rate regulation.

 

The fact that a portion of the Company’s operationsremain subject to rate regulation does not result in the Company selectingaccounting policies that would differ from generally accepted accountingprinciples.

 

Less than one-quarter of the Company’s revenues arefrom Wireline segment regulated services and subject to CRTC price regulation;none of the Company’s Wireless segment revenues are currently subject to CRTCregulation.

 

****

 

21

----

 

notes to consolidated financialstatements

 

The major categories of telecommunications servicesprovided by TELUS Communications Company partnership that are subject to rateregulation or have been forborne from rate regulation are as follows:

 
| **Regulated services**                                                                                                          | ** ** | **Forborne services (not subject to rate regulation)**                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                 |       |                                                                                                                                                          |
| ·    Residential wireline  local services in incumbent local exchange carrier regions in non-forborne  exchanges |       | ·    Residential wireline services in incumbent local  exchange carrier regions in forborne exchanges(1)                                  |
| ·    Business wireline local  services in incumbent local exchange carrier regions in non-forborne  exchanges    |       | ·    Business wireline services in incumbent local  exchange carrier regions in forborne exchanges(2)                                     |
| ·    Competitor services                                                                                         |       | ·    Non-incumbent local exchange carrier services                                                                                        |
| ·    Public telephone services                                                                                   |       | ·    Long distance services                                                                                                               |
|                                                                                                                                 |       | ·    Internet services                                                                                                                    |
|                                                                                                                                 |       | ·    International  telecommunications services                                                                                           |
|                                                                                                                                 |       | ·    Interexchange private  line services(3)                                                                                              |
|                                                                                                                                 |       | ·    Certain data services                                                                                                                |
|                                                                                                                                 |       | ·    Cellular, enhanced  specialized mobile radio digital (ESMR digital) and personal  communications services digital (PCS digital) |
|                                                                                                                                 |       | ·    Other wireless services,  including paging                                                                                           |
|                                                                                                                                 |       | ·    Sale of customer premises  equipment (CPE)                                                                                           |

 

----

(1)    Forborne on exchanges where two or morecompetitors, including wireless service providers, are offering or providingsimilar services.

(2)    Forborne on exchanges where one or morecompetitors, including wireless service providers, are offering or providingsimilar services.

(3)    Forborne on routes where one or morecompetitors are offering or providing services at DS-3 or greater bandwidth.

 

### **(b)**   Price caps form of regulation

### ** **

The CRTC has adopted a form of price cap regulationas the means by which it regulates the prices for the Company’stelecommunications rate regulated services. A four-year price regulation regimecommenced on June 1, 2002, with the issuance of the CRTC’sDecision 2002-34; on December 16, 2005, the CRTC issuedDecision 2005-69 that extended that price cap regime, without changes, fora period of one year to May 31, 2007. The CRTC conducted a review of theexisting price cap regulation which included an oral hearing held in Gatineau,Quebec. This proceeding was concluded in the fourth quarter of 2006 with theCRTC issuing its decision in this matter on April 30, 2007. The decisionwas consistent with the Company’s current accounting policies.

 

*Rate-setting methodology*: Under the prospectiveprice regulation framework, services are separated into seven servicecategories, or baskets, for those exchanges which continue to be regulated.Price constraints within the individual baskets are outlined in the followingtable.

** **
| **Capped and non-forborne basket**                          | ** ** | **Price cap constraint**              | ** ** | **Overriding  maximum annual  increase** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| Residential wireline services in incumbent local  exchange carrier regions |       |                                            |       |                                          |       |
| In non-high cost serving areas                                             |       | Capped  at existing rates                       |       | 0                                             | %          |
| In high cost serving areas                                                 |       | Increase  by lesser of inflation(1) or 5%  |       | 5                                             | %          |
| Business wireline services in incumbent local  exchange carrier regions    |       | Increase  annually by inflation(1)              |       | 10                                            | %          |
| Other  capped services                                                     |       | Increase  annually by inflation(1)              |       | 10                                            | %          |
| Competitor  services                                                       |       | Inflation(1) less 3.2% productivity offset |       | 0                                             | %          |
| Public  telephone services                                                 |       | One-time  $0.50 increase                        |       | N/A                                           |       |
| Services  with frozen rates (*e.g.* 9-1-1  service)                        |       | Capped  at existing rates                       |       | 0                                             | %          |

 

----

(1)    Asmeasured by chain-weighted Gross Domestic Product Price Index.

 

Primaryexchange rates for forborne services/exchanges are capped at existing rates.

 

### **(c)**   Other non-price cap regulation

 

*Other:* The CRTC has adopted an imputation testfiling requirement to set floor prices for rate regulated services. Theimputation test filing requirements ensure that the incumbent telephonecompanies do not reduce rates for services below their costs in an effort tothwart competitive entry or engage in predatory pricing to drive out existingcompetitors.

 

*Unbundlingof essential facilities:*  In an effort to foster facilities-basedcompetition in the provision of telecommunications services, the CRTC hasmandated that certain essential or near-essential facilities be made availableto competitors at rates based on their incremental costs plus an approvedmark-up. The CRTC has defined essential facilities as facilities which aremonopoly controlled, required by competitors as an input to provide servicesand which cannot be economically or technically duplicated by competitors(which include central office codes, subscriber listings and certain localloops in high cost serving areas). The incumbent local exchange carriers mustprovide certain non-essential facilities, which the CRTC deems to benear-essential, such as local loop facilities in low cost areas and transitingarrangements, at prices determined as if they were 

 

****

 

22

----

 

notes to consolidated financialstatements

 

essential facilities. Thisobligation on the part of the incumbent local exchange carriers will continueuntil the market for near-essential loops and transiting arrangements iscompetitive. The CRTC conducted an oral hearing on this matter in Gatineau,Quebec in the fourth quarter of 2007 and issued its decision in this matter on March 3,2008. The decision did not impact the treatment of the regulated rates.

 

*Voice contribution expense and portable subsidyrevenue:* Localexchange carriers’ costs of providing the level of basic residential servicesthat the CRTC requires to be provided in high cost serving areas is more thanthe CRTC allows the local exchange carriers to charge for the level of service.To ameliorate the situation, the CRTC collects contribution payments, in acentral fund, from all Canadian telecommunications service providers (includingvoice, data and wireless service providers) that are then disbursed as portablesubsidy payments to subsidize the costs of providing residential telephoneservices in high cost serving areas. The portable subsidy payments are paidbased upon a total subsidy requirement calculated on a per line/per bandsubsidy rate, as further discussed in Note 1(c). The CRTC currently determines,at a national level, the total contribution requirement necessary to pay theportable subsidies and then collects contribution payments from the Canadiantelecommunications service providers, calculated as a percentage of theirtelecommunications service revenue (as defined in CRTC Decision 2000-745 andTelecom Order CRTC 2001-220). The final contribution expense rate for 2008 is0.87% and the interim rate for 2009 has been similarly set at 0.87%. TheCompany’s contributions to the central fund, $52 million for the yearended December 31, 2008 (2007 — $60 million), are accounted for as anoperations expense and the portable subsidy receipts, $58 million for theyear ended December 31, 2008 (2007 — $63 million), are accounted foras local revenue.

 

## 5      financial instruments

##  

### **(a)**   Risks — overview

 

TheCompany’s financial instruments and the nature of risks which they may besubject to are as set out in the following table.

 
| ** **                                        | ** ** | **Risks**  | ** ** |
|---------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** |
| **Financial instrument**                     | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured at cost or amortized cost**            |       |       |       |   |   |   |   |   |   |   |   |
| Cash and temporary investments                    |       | X          |       |   |   | X |   | X |   |   |   |
| Accounts receivable                               |       | X          |       |   |   | X |   |   |   |   |   |
| Accounts payable                                  |       |       |       | X |   | X |   |   |   |   |   |
| Restructuring accounts payable                    |       |       |       | X |   |   |   |   |   |   |   |
| Short-term obligations                            |       |       |       | X |   |   |   | X |   |   |   |
| Long-term debt                                    |       |       |       | X |   | X |   | X |   |   |   |
| **Measured at fair value**                        |       |       |       |   |   |   |   |   |   |   |   |
| Short-term investments                            |       |       |       |   |   |   |   | X |   | X |   |
| Long-term investments                             |       |       |       |   |   |   |   |   |   | X |   |
| Foreign exchange derivatives(1)                   |       | X          |       | X |   | X |   |   |   |   |   |
| Share-based compensation derivatives(1)           |       | X          |       | X |   |   |   |   |   | X |   |
| Cross currency interest rate swap  derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |

 

----

(1)    Use of derivative financial instruments issubject to a policy which requires that no derivative transaction be enteredinto for the purpose of establishing a speculative or leveraged position (thecorollary being that all derivative transactions are to be entered into forrisk management purposes only) and sets criteria for the creditworthiness ofthe transaction counterparties.

 

### **(b)**   Credit risk

### ** **

Excluding credit risk, if any, arising from currency swaps settled on agross basis (see Note 5(c)), the best representation of the Company’smaximum exposure (excluding tax effects) to credit risk, which is a worst-casescenario and does not reflect results expected by the Company, is as set out inthe following table:

 
| **As at December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and temporary investments, net                  | ** ** | **$**    | **4**      |     | $          | 20 |   |
| Accounts receivable                                  | ** ** | **966**  |       | 711      |       |
| Derivative assets                                    | ** ** | **10**   |       | 4        |       |
| ** **                                           |       | **$**    | **980**    |     | $          | 735 |   |

 

****

 

23

----

 

notes to consolidated financialstatements

 

*Cash and temporary investments*: Credit risk associatedwith cash and temporary investments is minimized substantially by ensuring thatthese financial assets are placed with: governments; major financialinstitutions that have been accorded strong investment grade ratings by aprimary rating agency; and/or other creditworthy counterparties. An ongoingreview is performed to evaluate changes in the status of counterparties.

 

*Accounts receivable*: Credit risk associated with accounts receivable is minimized by theCompany’s large and diverse customer base, which covers substantially allconsumer and business sectors in Canada. The Company follows a program ofcredit evaluations of customers and limits the amount of credit extended whendeemed necessary. The Company maintains allowances for potential credit losses,and any such losses to date have been within management’s expectations.

 

 The following table presents an analysis ofthe age of customer accounts receivable not allowed for as at the dates of theConsolidated Statements of Financial Position. As at December 31, 2008,the weighted average life of customer accounts receivable is 28 days (2007— 29 days) and the weighted average life of past-due customer accountsreceivable is 64 days (2007 — 63 days). No interest is charged oncustomer accounts which are current. Thereafter, interest is charged at aregulatory-based rate on non-forborne Wireline segment outstanding balances anda market rate on forborne Wireline segment and Wireless segment outstandingbalances.

 
| **As at December 31 (millions)**                 | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Customer  accounts receivable net of allowance for doubtful accounts |       |     | ** ** |       |       |
| Current                                                              | ** ** | **$**    | **555**    | ** ** | $          | 375 |   |
| 30-60 days past billing date                                         | ** ** | **121**  | ** ** | 91         |       |
| 61-90 days past billing date                                         | ** ** | **47**   | ** ** | 33         |       |
| Greater than 90 days past billing date                               | ** ** | **43**   | ** ** | 29         |       |
| ** **                                                           |       | **$**    | **766**    | ** ** | $          | 528 |   |
| Customer accounts receivable (Note 21(b))                            | ** ** | **$**    | **843**    | ** ** | $          | 591 |   |
| Allowance for doubtful accounts                                      | ** ** | **(77**  | **)**      | (63        | )          |
| ** **                                                           |       | **$**    | **766**    | ** ** | $          | 528 |   |

 

TheCompany must make significant estimates in respect of the allowance fordoubtful accounts. Current economic conditions, historical information, why theaccounts are past-due and line of business from which the customer accountsreceivable arose are all considered when determining whether past-due accountsshould be allowed for; the same factors are considered when determining whetherto write off amounts charged to the allowance account against the customeraccount receivable. The provision for doubtful accounts is calculated on aspecific-identification basis for customer accounts receivable over a specificbalance threshold and on a statistically derived allowance basis for theremainder. No customer accounts receivable are written off directly to theprovision for doubtful accounts.

 

Thefollowing table presents a summary of the activity related to the Company’sallowance for doubtful accounts.

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|----------|------------|------------|------------|
| Balance, beginning of period                               | ** ** | **$**    | **63**     | ** ** | $          | 55 |   |
| Additions (provision for doubtful accounts)                | ** ** | **71**   | ** ** | 43         |       |
| Net use                                                    | ** ** | **(57**  | **)**      | (35        | )          |
| Balance, end of period                                     | ** ** | **$**    | **77**     | ** ** | $          | 63 |   |

 

Asidefrom the normal customer accounts receivable credit risk associated with itsretained interest, the Company has no continuing exposure to credit riskassociated with its trade receivables which are sold to an arm’s-lengthsecuritization trust, as discussed further in Note 14.

 

*Derivative assets (and derivative liabilities)*: Counterparties to the Company’s crosscurrency interest rate swap agreements, share-based compensation cash-settledequity forward agreements and foreign exchange derivatives are major financialinstitutions that have all been accorded investment grade ratings by a primaryrating agency. The dollar amount of credit exposure under contracts with anyone financial institution is limited and counterparties’ credit ratings aremonitored. The Company does not give or receive collateral on swap agreementsand hedging items due to its credit rating and those of its counterparties.While the Company is exposed to credit losses due to the non-performance of itscounterparties, the Company considers the risk of this remote. The Company’sderivative liabilities do not have credit-risk-related contingent features.

 

### **(c)**   Liquidity risk

### ** **

Asa component of the Company’s capital structure financial policies, discussedfurther in Note 3, the Company manages liquidity risk by maintaining bilateralbank facilities and syndicated credit facilities, by maintaining a commercialpaper program, by the sales of trade receivables to an arm’s-lengthsecuritization trust, by continuously monitoring forecast and actual cash 

 

****

 

24

----

 

notes to consolidated financialstatements

 

flowsand by managing maturity profiles of financial assets and financialliabilities. As disclosed in Note 18(g), the Company has significant debtmaturities in future years. As at December 31, 2008, the Company hasaccess to a shelf prospectus, in effect until September 2009, pursuant towhich it can offer $2.5 billion (2007 — $3.0 billion) of debt or equity securities. The Companybelieves that its investment grade credit ratings provide reasonable access tocapital markets.

 

TheCompany’s undiscounted financial liability contractual maturities, whichinclude interest thereon (where applicable), are as follows:

 
| ** **                        | ** ** | **Non-derivative**     | ** ** | **Derivative**                                       | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **Non-  interest**     | ** ** | **Long-term debt (see Note 18)** | ** ** | **Other financial liabilities** | ** ** | ** ** | ** ** |
| **As at  December 31,** | ** ** | **bearing  financial** | ** ** | **All except  capital**                         | ** ** | **Capital** | ** ** | **Currency swaps amounts  to be exchanged****(2)** | ** ** | ** ** | ** ** | **Currency swaps amounts  to be exchanged** | ** ** | ** ** | ** ** |
| **2008 (millions)**          | ** ** | **liabilities**        | ** ** | **leases****(1)(2)**                                 | ** ** | **leases** | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Other** | ** ** | **(Receive)** | ** ** | **Pay** | ** ** | **Total** | ** ** |
| 2009                              |       |                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First quarter                     |       | $                      | 1,093      |                                                 | $          | 44 |   | $ | 1 |   | $ | — |   | $ | — |   | $ | 62 |   | $ | (119 | ) | $ | 110 |   | $ | 1,191 |   |
| Balance of year                   |       | 239                    |       | 356                                                  |       | 2 |   | (187 | ) | 250 |   | 13 |   | (117 | ) | 116 |   | 672 |   |
| 2010                              |       | 15                     |       | 477                                                  |       | 2 |   | (187 | ) | 250 |   | 8 |   | — |   | — |   | 565 |   |
| 2011                              |       | 2                      |       | 2,641                                                |       | 1 |   | (2,439 | ) | 3,077 |   | — |   | — |   | — |   | 3,282 |   |
| 2012                              |       | —                 |       | 1,891                                                |       | — |   | — |   | — |   | — |   | — |   | — |   | 1,891 |   |
| 2013                              |       | —                 |       | 447                                                  |       | — |   | — |   | — |   | — |   | — |   | — |   | 447 |   |
| Thereafter                        |       | 1                      |       | 2,699                                                |       | — |   | — |   | — |   | — |   | — |   | — |   | 2,700 |   |
| Total                             |       | $                      | 1,350      |                                                 | $          | 8,555 |   | $ | 6 |   | $ | (2,813 | ) | $ | 3,577 |   | $ | 83 |   | $ | (236 | ) | $ | 226 |   | $ | 10,748 |   |

 

----

(1)    Interest payment cash outflows in respect ofcommercial paper and amounts drawn under the Company’s credit facility havebeen calculated based upon the rates in effect as at December 31, 2008.

(2)    The amounts included in the undiscountednon-derivative long-term debt in respect of the U.S. Dollar denominatedlong-term debt, and the corresponding amounts included in the long-term debt“currency swaps” receive column, have been determined based upon statement offinancial position date exchange rates. The U.S. Dollar denominated long-termdebt contractual maturity amounts, in effect, are reflected in the long-termdebt “currency swaps” pay column as gross cash flows are exchanged pursuant tothe cross currency interest rate swap agreements (see Note 18(b)).

 

### **(d)**   Currency risk

### ** **

TheCompany’s functional currency is the Canadian Dollar, but it regularlytransacts in U.S. Dollars due to certain routine revenues and operatingcosts being denominated in U.S. Dollars, as well as sourcing someinventory purchases and capital asset acquisitions internationally. The U.S.Dollar is the only foreign currency to which the Company has a significantexposure.

 

TheCompany’s foreign exchange risk management includes the use of foreign currencyforward contracts and currency options to fix the exchange rates on short-termU.S. Dollar denominated transactions and commitments. Hedge accounting isapplied to these short-term foreign currency forward contracts and currencyoptions on an exception basis only.

 

TheCompany is also exposed to currency risks in that the fair value or future cashflows of its U.S. Dollar denominated long-term debt will fluctuate becauseof changes in foreign exchange rates. Currency hedging relationships have beenestablished for the related semi-annual interest payments and principal paymentat maturity, as set out in Note 18(b).

 

### **(e)**   Interest rate risk

### ** **

Changesin market interest rates will cause fluctuations in the fair value or futurecash flows of temporary investments, short-term investments, short-termobligations, long-term debt and/or cross currency interest rate swapderivatives.

 

Whenthe Company has temporary investments, they have short maturities and fixedrates, thus their fair value will fluctuate with changes in market interestrates; absent monetization prior to maturity, the related future cash flows donot change due to changes in market interest rates.

 

Ifthe balance of short-term investments includes debt instruments and/ordividend-paying equity instruments, the Company could be exposed to interestrate risks.

 

Asshort-term obligations arising from bilateral bank facilities (Note 17),which typically have variable interest rates, are rarely outstanding forperiods that exceed one calendar week, interest rate risk associated with thisitem is not material.

 

Inrespect of the Company’s currently outstanding long-term debt, other than forcommercial paper and amounts drawn on its credit facility (Note 18(c)), itis all fixed-rate debt. The fair value of fixed-rate debt fluctuates withchanges in market interest rates; absent early redemption and/or foreignexchange rate fluctuations, the related future cash flows do not. Due to theshort maturities of commercial paper, its fair values are not materiallyaffected by changes in market interest rates but its cash flows representinginterest payments may be if the commercial paper is “rolled over”.

 

****

 

25

----

 

notes to consolidated financialstatements

 

Amountsdrawn on the Company’s short-term and long-term credit facilities will beaffected by changes in market interest rates in a manner similar to commercialpaper.

 

Similarto fixed-rate debt, the fair value of the Company’s cross currency interestrate swap derivatives fluctuates with changes in market interest rates as theinterest rate swapped to is fixed; absent early redemption, the related futurecash flows do not change due to changes in market interest rates.

 

### **(f)**    Other price risk

 

*Short-terminvestments:* If the balance of short-term investmentsincludes equity instruments, the Company would be exposed to equity pricerisks.

 

*Long-term investments:*The Company is exposed to equity price risks arising from investmentsclassified as available-for-sale. Such investments are held for strategicrather than trading purposes.

 

*Share-based compensation derivatives*: The Company is exposed to other price riskarising from cash-settled share-based compensation (appreciating Common Shareand Non-Voting Share prices increase both the expense and the potential cashoutflow). Cash-settled equity swap agreements have been entered into thatestablish a cap on the Company’s cost associated with its net-cash settled shareoptions (Note 12(b)) and fix the Company’s cost associated with itsrestricted stock units (Note 12(c)).

 

### **(g)**   Market risk

 

Netincome and other comprehensive income for the year ended December 31,2008, could have varied if the Canadian Dollar: U.S. Dollar foreignexchange rates, market interest rates and the Company’s Non-Voting Share pricesvaried by reasonably possible amounts from their actual statement of financialposition date values.

 

Thesensitivity analysis of the Company’s exposure to currency risk at thereporting date has been determined based upon the hypothetical change takingplace at the current statement of financial position date (as contrasted withapplying the hypothetical change to all relevant transactions during thereported period). The U.S. Dollar denominated balances and derivative financialinstrument notional amounts as at the statement of financial position date havebeen used in the calculations.

 

Thesensitivity analysis of the Company’s exposure to interest rate risk at the reportingdate has been determined based upon the hypothetical change taking place at thebeginning of the fiscal year and being held constant through to the currentstatement of financial position date. The relevant current statement offinancial position date principal and notional amounts have been used in thecalculations.

 

Thesensitivity analysis of the Company’s exposure to other price risk arising fromshare-based compensation at the reporting date has been determined based uponthe hypothetical change taking place at the current statement of financialposition date. The relevant current statement of financial position datenotional number of shares, including those in the cash-settled equity swapagreements, has been used in the calculations.

 

Theincome tax provisions, which are reflected net in the sensitivity analysis,reflect the applicable basic blended federal and provincial statutory incometax rates for the period.

 

****

 

26

----

 

notes to consolidated financialstatements

 
| ** **                                                                          | ** ** | **Reasonably possible changes in market risks****(1)** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **Cdn. $: U.S.$  exchange rate**                                 | ** ** | **Market  interest rate** | ** ** | **Non-Voting  Share price****(2)** | ** ** |
| **Year ended December 31, 2008 ($ in millions)** | ** ** | **10%**                                                                         | ** ** | **25 basis  points** | ** ** | **25%****(3)** | ** ** |
| Net income                                                                          |       | $                                                                               | 7          |   | $ | 3 |   | $ | 10 |   |
| Other comprehensive income                                                          |       | $                                                                               | 34         |   | $ | 3 |   | $ | 4 |   |

 

----

(1)    These sensitivities are hypothetical and should be used with caution.Favourable hypothetical changes in the assumptions result in an increasedamount, and unfavourable hypothetical changes in the assumptions result in adecreased amount, of net income and/or other comprehensive income. Changes innet income and/or other comprehensive income generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in netincome and/or other comprehensive income may not be linear.

 

In this table, the effect ofa variation in a particular assumption on the amount of net income and/or othercomprehensive income is calculated without changing any other assumption; inreality, changes in one factor may result in changes in another (for example,increases in market interest rates may result in more favourable foreignexchange rates (increased strength of the Canadian Dollar)), which mightmagnify or counteract the sensitivities.

 

The sensitivity analysisassumes that changes in exchange rates and market interest rates would berealized by the Company; in reality, the competitive marketplace in which theCompany operates would impact this assumption.

 

No provision has been madefor a difference in the notional number of shares associated with share-basedcompensation awards made during the reporting period that may have arisen dueto a difference in the Non-Voting Share price.

 

(2)    The hypothetical effects of changes in the price of the Company’sNon-Voting Shares are restricted to those which would arise from the Company’sshare-based compensation items which are accounted for as liability instrumentsand the associated cash-settled equity swap agreements.

 

(3)    To facilitate ongoing comparison of sensitivities, a constant varianceof approximate magnitude has been used. Reflecting a 4.5-year data period andcalculated on a monthly basis, which is consistent with the current assumptionsand methodology set out in Note 12(b), the volatility of the Company’sNon-Voting Share price as at December 31, 2008, was 26.4%; reflecting thetwelve-month data period ended December 31, 2008, the volatility was30.8%.

 

TheCompany is exposed to other price risks in respect of its financial instruments,as discussed further in Note 5(f). Changes in the Company’s Common Share pricewould not have materially affected the Company’s net income or its othercomprehensive income.

 

### **(h)**   Fair values

 

*General:* The carrying value of cash and temporaryinvestments, accounts receivable, accounts payable, restructuring accountspayable and short-term obligations approximates their fair values due to theimmediate or short-term maturity of these financial instruments. The carryingvalues of the Company’s investments accounted for using the cost method do notexceed their fair values.

 

Thecarrying value of short-term investments equals their fair value as they areclassified as held for trading. The fair value is determined directly byreference to quoted market prices in active markets.

 

Thefair values of the Company’s long-term debt are based on quoted market pricesin active markets. The fair values of the Company’s derivative financialinstruments used to manage exposure to interest rate and currency risks are estimatedbased on quoted market prices in active markets for the same or similarfinancial instruments or on the current rates offered to the Company forfinancial instruments of the same maturity as well as the use of discountedfuture cash flows using current rates for similar financial instruments subjectto similar risks and maturities.

 

Thefair values of the Company’s derivative financial instruments used to manageexposure to increases in compensation costs arising from certain forms ofshare-based compensation are based upon fair value estimates of the relatedcash-settled equity forward agreements provided by the counterparty to thetransactions (such fair value estimates being largely based upon the Company’sCommon Share and Non-Voting Share prices as at the statement of financialposition dates).

 

****

 

27

----

 

notes to consolidated financialstatements

 

TheCompany’s financial instruments that are measured at fair value on a recurringbasis in periods subsequent to initial recognition and the level within thefair value hierarchy used to measure them are as set out in the followingtable:

 
| ** **                                                      | ** ** | ** **          | ** ** | **Fair value measurements at reporting date using** | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------|------------|
| **As at December 31, 2008 (millions)** | ** ** | **Carrying  value** | ** ** | **Quoted prices  in active  markets for  identical items**    | ** ** | **Significant other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
| ** **                                                      | ** ** | ** **          | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Assets**                                                      |       |                |       |                                                                              |       |   |   |   |   |
| Foreign exchange derivatives                                    |       | $                   | 10         |                                                                              | $          | — |   | $ | 10 |   | $ | — |   |
| **Liabilities**                                                 |       |                |       |                                                                              |       |   |   |   |   |
| Share-based compensation derivatives                            |       | $                   | 82         |                                                                              | $          | — |   | $ | 82 |   | $ | — |   |
| Cross currency interest rate swap  derivatives                  |       | 778                 |       | —                                                                            |       | 778 |   | — |   |
|                                                            |       | $                   | 860        |                                                                              | $          | — |   | $ | 860 |   | $ | — |   |

 

*Non-derivative:*The Company’s non-derivative financial instruments that are measured at fair valueon a recurring basis subsequent to initial recognition and its long-term debt,which is measured at amortized cost, are as set out in the following table.

 
| ** **                                                                          | ** ** | **2008**             | ** ** | **2007**            | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| **As at December 31 (millions)**                                | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| Short-term investments designated as held  for trading upon initial recognition     | ** ** | **$**                | **—** | ** **          | **$**      | **—** |   | $ | 42 |   | $ | 42 |   |
| Long-term investments designated as  available-for-sale upon initial recognition(1) | ** ** | **$**                | **—** | ** **          | **$**      | **—** |   | $ | 14 |   | $ | 14 |   |
| Long-term debt                                                                      | ** ** | **$**                | **6,352**  | ** **          | **$**      | **6,445** |   | $ | 4,589 |   | $ | 4,960 |   |

 

----

(1)    The carrying value for long-term investmentspresented in this schedule excludes $42 (2007 – $25) of investments incompanies over which the Company has significant influence and investments insecurities which do not have quoted market prices in an active market.

 

*Derivative:*The Company’s derivative financial instruments that are measured at fair valueon a recurring basis subsequent to initial recognition are as set out in thefollowing table.

 
| ** **                                                                                                                                                                             | ** ** | ** **                      | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|----------------------|------------|
| **As at December 31 (millions)**                                                                                                                                   | ** ** | **Maximum  maturity date** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| **Current Assets**                                                                                                                                                                     |       |                            |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| Derivatives designated as held for trading  upon initial recognition and used to manage currency risks arising from U.S.  Dollar transactions to which hedge accounting is not applied |       |                            |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| -  Revenues                                                                                                                                                                  |       | 2009                            | ** ** | **$**                | **29**     | ** **           | **$**      | **—** | ** ** | **$** | **—** |   | $ | 22 |   | $ | 1 |   | $ | 1 |   |
| -  Purchases                                                                                                                                                                 |       | 2009                            | ** ** | **$**                | **95**     | ** **           | **3**      | ** ** | **3** |   | $ | 25 |   | 1 |   | 1 |   |
| Derivatives(1) designated as held  for hedging(2) upon  initial recognition and used to manage                                                                               |       |                            |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| - Currency risks arising from  U.S. Dollar denominated purchases                                                                                                             |       | 2009                            | ** ** | **$**                | **102**    | ** **           | **7**      | ** ** | **7** |   | $ | 44 |   | — |   | — |   |
| - Changes in share-based compensation  costs (Note 12(c))                                                                                                                    |       | 2008                            | ** ** | ** **           | ** ** | **—**           | ** ** | **—** |   | $ | 27 |   | 2 |   | — |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **10**               |       |   |   |   |   | 4 |   |   |   |
| Less: Net amounts due to counterparties in  respect of derivatives used to manage changes in share-based compensation  costs and classified as held for hedging                        |       |                            | ** ** | ** **           | ** ** | **—**           | ** ** | ** ** |   |   |   | (2 | ) |   |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **$**                | **10**     |   | **$** | **10** |   |   |   | $ | 2 |   | $ | 2 |   |

 

****

 

28

----

 

notes to consolidated financialstatements

 
| ** **                                                                                                                                                                             | ** ** | ** **                      | ** ** | **2008**             | ** ** | **2007**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|----------------------|------------|
| **As at December 31 (millions)**                                                                                                                                   | ** ** | **Maximum  maturity date** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Notional  amount** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| **Current Liabilities**                                                                                                                                                                |       |                            | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Derivatives designated as held for trading  upon initial recognition and used to manage currency risks arising from U.S.  Dollar transactions to which hedge accounting is not applied |       |                            |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| -  Purchases                                                                                                                                                                 |       | 2008                            | ** ** | ** **           | ** ** | **$**                | **—** | ** ** | **$** | **—** |   | $ | 30 |   | $ | 1 |   | $ | 1 |   |
| Derivativesused to manage changes in  share-based compensation costs and classified as held for                                                                                        |       |                            | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| - Trading (Note 12(b))                                                                                                                                                       |       | 2012                            | ** ** | **$**                | **177**    | ** **           | **64**     | ** ** | **64** |   | $ | 220 |   | 26 |   | 27 |   |
| - Hedging(1)(2) (Note 12(c))                                                                                                                                            |       | 2009                            | ** ** | **$**                | **28**     | ** **           | **11**     | ** ** | **13** |   | $ | — |   | — |   | — |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **75**               |       |   |   |   |   | 27 |   |   |   |
| Add: Net amounts due to counterparties in  respect of derivatives used to manage changes in share-based compensation  costs and classified as held for                                 |       |                            | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| - Trading (Note 12(b))                                                                                                                                                       |       |                            | ** ** | ** **           | ** ** | **—**           | ** ** | ** ** |   |   |   | 1 |   |   |   |
| - Hedging (Note 12(c))                                                                                                                                                       |       |                            | ** ** | ** **           | ** ** | **2**                | ** ** | ** ** |   |   |   | — |   |   |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **$**                | **77**     |   | **$** | **77** |   |   |   | $ | 28 |   | $ | 28 |   |
| **Other Long-Term Liabilities**                                                                                                                                                        |       |                            | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Derivatives(1) used to manage  changes in share-based compensation costs and classified as held for hedging (2) (Note 12(c))                                            |       | 2010                            | ** ** | **$**                | **26**     | ** **           | **$**      | **7** | ** ** | **$** | **8** |   | $ | 23 |   | $ | 4 |   | $ | 4 |   |
| Derivatives(1) classified as held  for hedging(2) and  used to manage currency risks associated with U.S. Dollar denominated  debt (Note 18(b))                         |       | 2011                            | ** ** | **$**                | **2,951**  | ** **           | **778**    | ** ** | **783** |   | $ | 2,951 |   | 1,179 |   | 1,188 |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **785**              |       |   |   |   |   | 1,183 |   |   |   |
| Add: Net amounts due to counterparties in  respect of derivatives used to manage changes in share-based compensation  costs and classified as held for hedging                         |       |                            | ** ** | ** **           | ** ** | **1**                | ** ** | ** ** |   |   |   | 1 |   |   |   |
| Add: Interest payable in respect of  derivatives used to manage currency risks associated with U.S. Dollar  denominated debt and classified as held for hedging                   |       |                            | ** ** | ** **           | ** ** | **5**                | ** ** | ** ** |   |   |   | 8 |   |   |   |
|                                                                                                                                                                                   | ** ** | ** **                      | ** ** | ** **           | ** ** | **$**                | **791**    |   | **$** | **791** |   |   |   | $ | 1,192 |   | $ | 1,192 |   |

 

----

(1)    Designated as cash flow hedging items.

(2)    Hedge accounting is applied to derivativesthat are designated as held for hedging.

 

****

 

29

----

 

notes to consolidated financialstatements

 

### **(i)**    Recognition of derivative gains andlosses

 

Thefollowing table sets out the gains and losses on derivative instrumentsclassified as cash flow hedging items and their location within theConsolidated Statements of Income and Other Comprehensive Income.

 
| ** **                                                                              | ** ** | **Amount of gain (loss)  recognized in other  comprehensive income  (effective portion)** | ** ** | **Gain (loss) reclassified from other  comprehensive income into income  (effective portion) (Note 19(c))** | ** ** | **Gain (loss) recognized in income  on derivative (ineffective portion)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| **Years ended December 31 **                                        | ** ** | **(Note 19(c))**                                                                                                        | ** ** | ** **                                                                                                                                                    | ** ** | **Amount**                                                                                                   | ** ** | ** ** | ** ** | **Amount** | ** ** |
| **(millions)**                                                                          | ** ** | **2008**                                                                                                                     | ** ** | **2007**                                                                                                                                                      | ** ** | **Location**                                                                                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **Location** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Derivatives used to manage currency risks                                               |       |                                                                                                                         |       |                                                                                                                                                          |       |                                                                                                         |       |   |   |   |   |   |   |   |   |   |   |
| -Associated with U.S. Dollar  denominated debt                                     | ** ** | **$**                                                                                                                        | **402**    |                                                                                                                                                          | $          | (345                                                                                                         | )          | Financing costs | ** ** | **$** | **436** | ** ** | $ | (475 | ) | Financing costs | ** ** | **$** | **(1** | **)** | $ | — |   |
| -Arising from U.S. Dollar denominated  purchases                                        | ** ** | **14**                                                                                                                       |       | (9                                                                                                                                                            | )          | Operations                                                                                                   | ** ** | **7** | ** ** | (9 | ) | Operations | ** ** | **—** | ** ** | — |   |
| Derivatives used to manage changes in  share-based compensation costs (Note 12(c)) | ** ** | **(11**                                                                                                                      | **)**      | —                                                                                                                                                        |       | Operations                                                                                                   | ** ** | **(3** | **)** | 7 |   | Operations | ** ** | **—** | ** ** | — |   |
|                                                                                    | ** ** | **$**                                                                                                                        | **405**    |                                                                                                                                                          | $          | (354                                                                                                         | )          |   | ** ** | **$** | **440** |   | $ | (477 | ) |   | ** ** | **$** | **(1** | **)** | $ | — |   |

 

Thefollowing table sets out gains and losses arising from derivative instruments:classified as held for trading items; not designated as being in a hedgingrelationship as discussed in Note 1(i); and their location within theConsolidated Statements of Income and Other Comprehensive Income.

 
| ** **                                                                              | ** ** | **Gain (loss) recognized in income on derivatives** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                                                                        | ** ** | **Amount** | ** ** |
| **Years ended December 31 (millions)**                              | ** ** | **Location**                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Derivatives used to manage currency risks                                               |       | Financing costs                                                                   | ** ** | **$** | **15** | ** ** | $ | (16 | ) |
| Derivatives used to manage changes in  share-based compensation costs (Note 12(b)) |       | Operations                                                                        | ** ** | **(47** | **)** | (23 | ) |
| ** **                                                                              |       |                                                                              |       | **$** | **(32** | **) ** | $ | (39 | ) |

 

## 6      segmented information

 

TheCompany’s reportable segments are Wireline and Wireless. The Wireline segment****includes****voice local, voice long distance, data and other telecommunicationsservices excluding wireless. The Wireless segment includes digital personalcommunications services, equipment sales and wireless Internet services.Segmentation is based on similarities in technology, the technical expertiserequired to deliver the products and services, customer characteristics, thedistribution channels used and regulatory treatment. Intersegment sales arerecorded at the exchange value, which is the amount agreed to by the parties.The following segmented information is regularly reported to the Company’sChief Executive Officer (the Company’s chief operating decision maker).

 

****

 

30

----

 

notes to consolidated financialstatements

 
| **Years ended December 31**    | ** ** | **Wireline** | ** ** | **Wireless** | ** ** | **Eliminations** | ** ** | **Consolidated**                                              | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|------------------|------------|---------------------------------------------------------------|------------|
| **(millions)**                                | ** ** | **2008**     | ** ** | **2007**     | ** ** | **2008**         | ** ** | **2007**                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating revenues**                        |       | ** **   | ** ** |         |       |             |       |                                                          |       |   |   |   |   | ** ** | ** ** |   |   |
| External revenue                              | ** ** | **$**        | **5,021**  | ** **   | $          | 4,810            |       | **$**                                                         | **4,632**  | ** ** | $ | 4,264 |   | **$** | **—** | ** ** | $ | — |   | **$** | **9,653** | ** ** | $ | 9,074 |   |
| Intersegment revenue                          | ** ** | **131**      | ** ** | 114          |       | **28**           | ** ** | 27                                                            |       | **(159** | **)** | (141 | ) | **—** | ** ** | — |   |
| ** **                                    |       | **5,152**    | ** ** | 4,924        |       | **4,660**        | ** ** | 4,291                                                         |       | **(159** | **)** | (141 | ) | **9,653** | ** ** | 9,074 |   |
| **Operating expenses**                        |       | ** **   | ** ** |         |       | ** **       | ** ** |                                                          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Operations expense                            | ** ** | **3,327**    | ** ** | 3,222        |       | **2,647**        | ** ** | 2,384                                                         |       | **(159** | **)** | (141 | ) | **5,815** | ** ** | 5,465 |   |
| Restructuring costs                           | ** ** | **51**       | ** ** | 19           |       | **8**            | ** ** | 1                                                             |       | **—** | ** ** | — |   | **59** | ** ** | 20 |   |
| ** **                                    |       | **3,378**    | ** ** | 3,241        |       | **2,655**        | ** ** | 2,385                                                         |       | **(159** | **)** | (141 | ) | **5,874** | ** ** | 5,485 |   |
| EBITDA(1)                                     | ** ** | **$**        | **1,774**  | ** **   | $          | 1,683            |       | **$**                                                         | **2,005**  | ** ** | $ | 1,906 |   | **$** | **—** | ** ** | $ | — |   | **$** | **3,779** | ** ** | $ | 3,589 |   |
| Capital expenditures                          | ** ** | **$**        | **1,311**  | ** **   | $          | 1,219            |       | **$**                                                         | **548**    | ** ** | $ | 551 |   | **$** | **—** | ** ** | $ | — |   | **$** | **1,859** | ** ** | $ | 1,770 |   |
| Advanced wireless services spectrum  licences | ** ** | **—**   | ** ** | —       |       | **882**          | ** ** | —                                                        |       | **—** | ** ** | — |   | **882** | ** ** | — |   |
| CAPEX(2)                                      | ** ** | **$**        | **1,311**  | ** **   | $          | 1,219            |       | **$**                                                         | **1,430**  | ** ** | $ | 551 |   | **$** | **—** | ** ** | $ | — |   | **$** | **2,741** | ** ** | $ | 1,770 |   |
| EBITDA less CAPEX                             | ** ** | **$**        | **463**    | ** **   | $          | 464              |       | **$**                                                         | **575**    | ** ** | $ | 1,355 |   | **$** | **—** | ** ** | $ | — |   | **$** | **1,038** | ** ** | $ | 1,819 |   |
| **Operating expenses**(as  adjusted)(3)       |       | ** **   | ** ** |         |       | ** **       | ** ** |                                                          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Operations expense (as adjusted)(3)           | ** ** | **3,327**    | ** ** | 3,077        |       | **2,647**        | ** ** | 2,360                                                         |       | **(159** | **)** | (141 | ) | **5,815** | ** ** | 5,296 |   |
| Restructuring costs                           | ** ** | **51**       | ** ** | 19           |       | **8**            | ** ** | 1                                                             |       | **—** | ** ** | — |   | **59** | ** ** | 20 |   |
| ** **                                    |       | **3,378**    | ** ** | 3,096        |       | **2,655**        | ** ** | 2,361                                                         |       | **(159** | **)** | (141 | ) | **5,874** | ** ** | 5,316 |   |
| EBITDA (as adjusted)(3)                       | ** ** | **$**        | **1,774**  | ** **   | $          | 1,828            |       | **$**                                                         | **2,005**  | ** ** | $ | 1,930 |   | **$** | **—** | ** ** | $ | — |   | **$** | **3,779** | ** ** | $ | 3,758 |   |
| Capital expenditures                          | ** ** | **$**        | **1,311**  | ** **   | $          | 1,219            |       | **$**                                                         | **548**    | ** ** | $ | 551 |   | **$** | **—** | ** ** | $ | — |   | **$** | **1,859** | ** ** | $ | 1,770 |   |
| Advanced wireless services spectrum  licences | ** ** | **—**   | ** ** | —       |       | **882**          | ** ** | —                                                        |       | **—** | ** ** | — |   | **882** | ** ** | — |   |
| CAPEX(2)                                      | ** ** | **$**        | **1,311**  | ** **   | $          | 1,219            |       | **$**                                                         | **1,430**  | ** ** | $ | 551 |   | **$** | **—** | ** ** | $ | — |   | **$** | **2,741** | ** ** | $ | 1,770 |   |
| EBITDA (as adjusted) less CAPEX               | ** ** | **$**        | **463**    | ** **   | $          | 609              |       | **$**                                                         | **575**    | ** ** | $ | 1,379 |   | **$** | **—** | ** ** | $ | — |   | **$** | **1,038** | ** ** | $ | 1,988 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | EBITDA (as adjusted)(from above)                              |       | **$** | **3,779** | ** ** | $ | 3,758 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Incremental charge(3)                                         |       | **—** | ** ** | 169 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | EBITDA (from above)                                           |       | **3,779** | ** ** | 3,589 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Depreciation                                                  |       | **1,384** | ** ** | 1,355 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Amortization                                                  |       | **329** | ** ** | 260 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | **Operating income**                                          |       | **2,066** | ** ** | 1,974 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Other expense, net                                            |       | **36** | ** ** | 36 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Financing costs                                               |       | **463** | ** ** | 440 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | **Income before income taxes and  non-controlling interests** |       | **1,567** | ** ** | 1,498 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Income taxes                                                  |       | **436** | ** ** | 233 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | Non-controlling interests                                     |       | **3** | ** ** | 7 |   |
|                                          | ** ** | ** **   | ** ** |         |       | ** **       | ** ** | **Net income**                                                |       | **$** | **1,128** | ** ** | $ | 1,258 |   |
|                                               |            |              |            |              |            |                  |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | Earnings Before Interest,  Taxes, Depreciation and Amortization (EBITDA) is a measure that does not have  any standardized meaning prescribed by GAAP and is therefore unlikely to be  comparable to similar measures presented by other issuers; EBITDA is defined  by the Company as operating revenues less operations expense and  restructuring costs. The Company has issued guidance on, and reports, EBITDA  because it is a key measure used by management to evaluate performance of its  business segments and is utilized in measuring compliance with certain debt  covenants.           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Total capital expenditures  (CAPEX) is the sum of capital expenditures and advanced wireless services  spectrum licences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (3) | Substantially all of the  Company’s share option awards that were granted prior to January 1,  2005, and which were outstanding on January 1, 2007, were amended by  adding a net-cash settlement feature (see Note 12(b)); such amendment  resulted in an incremental charge to operations of $NIL (2007 - $169) and did  not result in an immediate cash outflow. In respect of 2008 and 2007 results  provided to the Company’s chief operating decision maker, operations expense  and EBITDA are being presented both with, and without, the impact of such  amendment. |

 

****

 

31

----

 

notes to consolidated financial statements

 

## 7                  restructuring costs

 
| **Years ended December 31 (millions)** | ** ** | **2008**   | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|
| Restructuring costs                                        |       |       |       |     |       |
| Workforce                                                  |       |       |       |     |       |
| Voluntary                                                  | ** ** | **$**      | **9**      |     | $          | 5 |   |
| Involuntary                                                | ** ** | **50**     |       | 14       |       |
| Other                                                      | ** ** | **—** |       | 1        |       |
| ** **                                                 |       | **59**     |       | 20       |       |
| Disbursements                                              |       |       |       |     |       |
| Workforce                                                  |       |       |       |     |       |
| Voluntary                                                  | ** ** | **21**     |       | 14       |       |
| Involuntary and other                                      | ** ** | **21**     |       | 23       |       |
| Other                                                      | ** ** | **1**      |       | 1        |       |
| ** **                                                 |       | **43**     |       | 38       |       |
| Expenses greater than (less than)  disbursements           | ** ** | **16**     |       | (18      | )          |
| Restructuring accounts payable and accrued  liabilities    |       |       |       |     |       |
| Balance, beginning of period                               | ** ** | **35**     |       | 53       |       |
| Balance, end of period                                     | ** ** | **$**      | **51**     |     | $          | 35 |   |

 

In 2008, arising from itscompetitive efficiency program, the Company undertook a number of smallerinitiatives, such as operational consolidation, rationalization andintegration. These initiatives were aimed to improve the Company’s operatingproductivity and competitiveness. The Company’s estimate of restructuring costsin 2009 is approximately $50-75 million.

 

## 8                  financing costs

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|----------|------------|------------|------------|
| Interest on long-term debt                                 | ** ** | **$**    | **468**    | ** ** | $          | 464 |   |
| Interest on short-term obligations and  other              | ** ** | **13**   | ** ** | —     |       |
| Foreign exchange(Note 5(i))                                | ** ** | **(1**   | **)**      | 13         |       |
| ** **                                                 |       | **480**  | ** ** | 477        |       |
| Capitalized interest during construction                   | ** ** | **(3**   | **)**      | —     |       |
| ** **                                                 |       | **477**  | ** ** | 477        |       |
| Interest income                                            |       |     | ** ** |       |       |
| Interest on tax refunds                                    | ** ** | **(9**   | **)**      | (27        | )          |
| Other interest income                                      | ** ** | **(5**   | **)**      | (10        | )          |
| ** **                                                 |       | **(14**  | **)**      | (37        | )          |
| ** **                                                 |       | **$**    | **463**    | ** ** | $          | 440 |   |

 

## ****

 

32

----

** **

notes to consolidated financial statements

 

## 9                  income taxes

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current                                                    | ** ** | **$**    | **275**    |     | $          | (144 | ) |
| Future                                                     | ** ** | **161**  |       | 377      |       |
| ** **                                                 |       | **$**    | **436**    |     | $          | 233 |   |

 

TheCompany’s income tax expense differs from that calculated by applying statutoryrates for the following reasons:

 
| **Years ended December 31 ($ in millions)**                            | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Basic blended federal and provincial tax at  statutory income tax rates                              | ** ** | **$**    | **486**    | ** ** | **31.0**   | **%** | $ | 503 |   | 33.6 | % |
| Revaluation of future income tax liability  to reflect future statutory income tax rates             | ** ** | **(41**  | **)**      |       | ** ** | (177 | ) |   |   |
| Tax rate differential on, and consequential  adjustments from, reassessment of prior year tax issues | ** ** | **(21**  | **)**      |       | ** ** | (79 | ) |   |   |
| Share option award compensation                                                                      | ** ** | **6**    | ** ** |       | ** ** | (4 | ) |   |   |
| Other                                                                                                | ** ** | **6**    | ** ** |       | ** ** | (10 | ) |   |   |
| Income tax expense per Consolidated  Statements of Income and Other Comprehensive Income             | ** ** | **$**    | **436**    | ** ** | **27.8**   | **%** | $ | 233 |   | 15.6 | % |

 

Asreferred to in Note 1(b), the Company must make significant estimates inrespect of the composition of its future income tax liability. The operationsof the Company are complex and the related tax interpretations, regulations andlegislation are continually changing. As a result, there are usually some taxmatters in question. Temporary differences comprising the future income taxliability are estimated as follows:

 
| **As at December 31 (millions)**                             | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Capital assets                                                                   |       |       | ** ** |     |       |
| Property, plant, equipment, other and intangible  assets subject to amortization | ** ** | **$**      | **(156**   | **)**    | $          | (51 | ) |
| Intangible assets with indefinite lives                                          | ** ** | **(830**   | **)**      | (746     | )          |
| Partnership income unallocated for income  tax purposes                          |       | **(556**   | **)**      | (631     | )          |
| Net pension and share-based compensation  amounts                                |       | **(306**   | **)**      | (219     | )          |
| Reserves not currently deductible                                                | ** ** | **70**     | ** ** | 71       |       |
| Losses available to be carried forward                                           | ** ** | **44**     | ** ** | 18       |       |
| Other                                                                            | ** ** | **20**     | ** ** | 6        |       |
| ** **                                                                       |       | **$**      | **(1,714** | **)**    | $          | (1,552 | ) |
| Presented on the Consolidated Statements of  Financial Position as:              |       |       | ** ** |     |       |
| Future income tax liability                                                      |       |       | ** ** |     |       |
| Current                                                                          |       | **$**      | **(459**   | **)**    | $          | (504 | ) |
| Non-current                                                                      |       | **(1,255** | **)**      | (1,048   | )          |
| Net future income tax asset (liability)                                          |       | **$**      | **(1,714** | **)**    | $          | (1,552 | ) |

 

TheCompany expects to be able to utilize its non-capital losses prior to expiry.

 

TheCompany has net capital losses and such losses may only be applied againstrealized taxable capital gains. The Company has included a net capital losscarry-forward of $606 million (2007 — $618 million) in its Canadianincome tax returns. During the year ended December 31, 2008, the Companyrecognized the benefit of $19 million (2007 — $7 million) in netcapital losses. Of the net capital losses carried-forward, as at December 31,2008, $604 million (2007 — $604 million) have been denied on audit bythe Canada Revenue Agency and the Company is considering various courses ofaction with a view to confirming all or a part of such net capital losses.

 

TheCompany conducts research and development activities, which are eligible toearn Investment Tax Credits. During the year ended December 31, 2008, theCompany recorded Investment Tax Credits of $12 million (2007 —$11 million), $8 million (2007 — $3 million) of which wasrecorded as a reduction of capital and the balance of which was recorded as areduction of Operations expense.

 

## 10            per share amounts

##  

Basicnet income per Common Share and Non-Voting Share is calculated by dividingCommon Share and Non-Voting Share income by the total weighted average CommonShares and Non-Voting Shares outstanding during the period. Diluted net incomeper Common Share and Non-Voting Share is calculated to give effect to shareoption awards.

 

****

 

33

----

 

notes to consolidated financialstatements

 

Thefollowing table presents the reconciliations of the denominators of the basicand diluted per share computations. Net income equalled diluted Common Shareand Non-Voting Share income for all periods presented.

 
| **Years ended December 31 (millions)**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Basic total weighted average Common Shares  and Non-Voting Shares outstanding   | ** ** | **320**  |       | 332      |       |
| Effect of dilutive securities                                                   |       |     |       |     |       |
| Share option  awards                                                            | ** ** | **2**    | ** ** | 2        |       |
| Diluted total weighted average Common  Shares and Non-Voting Shares outstanding | ** ** | **322**  |       | 334      |       |

 

Forthe year ended December 31, 2008, certain outstanding share option awards,in the amount of 6 million (2007 — 1 million), were not included inthe computation of diluted income per Common Share and Non-Voting Share becausethe share option awards’ exercise prices were greater than the average marketprice of the Common Shares and Non-Voting Shares during the reported periods.

 

## 11            dividends per share

 
| ** **                                                                                          | ** ** | **2008**                | ** ** | **2007**                       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| **Years ended December 31 (millions except  per share amounts)** | ** ** | **Declared  effective** | ** ** | **Paid to  shareholders** | ** ** | **Total** | ** ** | **Declared  effective** | ** ** | **Paid to  shareholders** | ** ** | **Total** | ** ** |
| Dividend per Common Share and  Non-Voting Share                                                |       |                    |       |                           |       |   |   |   |   |   |   |   |   |
| Dividend $0.45 (2007 – $0.375)                                                                 |       | Mar. 11, 2008      |       | Apr. 1, 2008              | ** ** | **$** | **145** |   | Mar. 9, 2007 |   | Apr. 1, 2007 |   | $ | 126 |   |
| Dividend  $0.45 (2007 – $0.375)                                                                |       | Jun. 10, 2008      |       | Jul. 1, 2008              | ** ** | **144** |   | Jun. 8, 2007 |   | Jul. 1, 2007 |   | 125 |   |
| Dividend $0.45 (2007 – $0.375)                                                                 |       | Sept. 10, 2008          |       | Oct. 1, 2008              | ** ** | **144** |   | Sept. 10, 2007 |   | Oct. 1, 2007 |   | 123 |   |
| Dividend $0.475 (2007 – $0.45)                                                                 |       | Dec. 11, 2008      |       | Jan. 2, 2009              | ** ** | **151** |   | Dec. 11, 2007 |   | Jan. 1, 2008 |   | 147 |   |
| ** **                                                                                          |       |                    |       |                           |       | **$** | **584** |   |   |   |   |   | $ | 521 |   |

 

OnFebruary 11, 2009, the Board of Directors declared a quarterly dividend of$0.475 per share on the issued and outstanding Common Shares and Non-VotingShares of the Company payable on April 1, 2009, to holders of record atthe close of business on March 11, 2009. The final amount of the dividendpayment depends upon the number of Common Shares and Non-Voting Shares issuedand outstanding at the close of business on March 11, 2009.

 

## 12            share-based compensation

##  

### **(a)**          Details of share-based compensationexpense

### ** **

Reflected in the Consolidated Statements of Income and Other Comprehensive Income as“Operations expense” and the Consolidated Statements of Cash Flows are thefollowing share-based compensation amounts:

 
| ** **                                             | ** ** | **2008**                | ** ** | **2007**                                      | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement of  cash flows  adjustment** | ** ** | **Operations  expense** | ** ** | **Associated  operating  cash outflows** | ** ** | **Statement of  cash flows  adjustment** | ** ** |
| Share option awards(1)                                 | ** ** | **$**                   | **18**     | ** **                                    | **$**      | **(15** | **)** | **$** | **3** |   | $ | 184 |   | $ | (84 | ) | $ | 100 |   |
| Restricted stock units(2)                              | ** ** | **34**                  | ** ** | **(32**                                       | **)**      | **2** |   | 29 |   | (33 | ) | (4 | ) |
| Employee share purchase plan                           | ** ** | **36**                  | ** ** | **(36**                                       | **)**      | **—** |   | 34 |   | (34 | ) | — |   |
| ** **                                             | ** ** | **$**                   | **88**     | ** **                                    | **$**      | **(83** | **)** | **$** | **5** |   | $ | 247 |   | $ | (151 | ) | $ | 96 |   |

 

----

(1)             The expense (recovery) arising from shareoptions with the net-cash settlement feature, net of cash-settled equity swapagreement effects (see Note 5(i)), was $NIL (2007 — $169).

 

(2)             The expense arising from restricted stockunits was net of cash-settled equity swap agreement effects (see Note 5(i)).

 

Forthe year ended December 31, 2008, the associated operating cash outflowsin respect of share option awards include cash outflows arising from thecash-settled equity swap agreements of $9 million (2007 — cash inflows of$8 million). Similarly, for the year ended December 31, 2008, the associatedoperating cash outflows in respect of restricted stock units include cashoutflows arising from hedging of $9 million (2007 — cash inflows of$5 million). For the year ended December 31, 2008, the income taxbenefit arising from share-based compensation was $22 million (2007 —$85 million); as disclosed in Note 9, not all share-basedcompensation amounts are deductible for income tax purposes.

 

****

### ** **

34

----

 

notes to consolidated financial statements

 

### **(b)**          Share option awards

### ** **

The Company applies the fair value based method ofaccounting for share-based compensation awards granted to employees. Shareoption awards typically vest over a three-year period (the requisite serviceperiod), but may vest over periods of up to five years. The vesting method ofshare option awards, which is determined on or before the date of grant, may beeither cliff or graded; all share option awards granted subsequent to 2004 havebeen cliff-vesting awards.

 

The weighted average fair value of share option awardsgranted, and the weighted average assumptions used in the fair value estimationat the time of grant, using the Black-Scholes model (a closed-form optionpricing model), are as follows:

 
| **Years ended December 31**        | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------------|------------|----------|------------|------------|------------|
| Share option award fair value (per share  option) | ** ** | **$**    | **7.10**   | ** ** | $          | 12.34 |   |
| Risk free interest rate                           | ** ** | **3.6**  | **%**      | 4.1        | %          |
| Expected lives(1) (years)                    | ** ** | **4.5**  | ** ** | 4.5        |       |
| Expected volatility                               | ** ** | **24.3** | **%**      | 26.3       | %          |
| Dividend yield                                    | ** ** | **4.1**  | **%**      | 2.7        | %          |
|                                                   |            |          |            |            |            |  |  |

 

----

(1)             The maximum contractual term of the shareoption awards granted in 2008 and 2007 was seven years.

 

Therisk free interest rate used in determining the fair value of the share optionawards is based on a Government of Canada yield curve that is current at thetime of grant. The expected lives of the share option awards are based onhistorical share option award exercise data of the Company. Similarly, expectedvolatility considers the historical volatility of the Company’s Non-VotingShares. The dividend yield is the annualized dividend current at the date ofgrant divided by the share option award exercise price. Dividends are not paidon unexercised share option awards and are not subject to vesting.

 

Hadthe weighted average assumptions for grants of share option awards that arereflected in the expense disclosures above been varied by 10% and 20% changes,the compensation cost arising from share option awards for the year ended December 31,2008, would have varied as follows:

 
| ** **                    | ** ** | **Hypothetical change in  assumptions****(1)** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|
| **($ in millions)** | ** ** | **10%**                                                  | ** ** | **20%** | ** ** |
| Risk free interest rate       |       | $                                                        | —     |   | $ | 1 |   |
| Expected lives (years)        |       | $                                                        | 1          |   | $ | 1 |   |
| Expected volatility           |       | $                                                        | 2          |   | $ | 3 |   |
| Dividend yield                |       | $                                                        | 1          |   | $ | 1 |   |

 

----

(1)             These sensitivities are hypothetical andshould be used with caution. Favourable hypothetical changes in the assumptionsresult in a decreased amount, and unfavourable hypothetical changes in theassumptions result in an increased amount, of the compensation cost arisingfrom share option awards. As the figures indicate, changes in fair value basedon a 10% variation in assumptions generally cannot be extrapolated because therelationship of the change in assumption to the change in fair value may not belinear; in particular, variations in expected lives are constrained by vestingperiods and legal lives. Also, in this table, the effect of a variation in aparticular assumption on the amount of the compensation cost arising from shareoption awards is calculated without changing any other assumption; in reality,changes in one factor may result in changes in another (for example, increasesin risk free interest rates may result in increased dividend yields), whichmight magnify or counteract the sensitivities.

 

Some share option awards have a net-equity settlementfeature. As discussed further in Note 19(e), it is at the Company’s optionwhether the exercise of ashare option award is settled as a share option or settled using the net-equitysettlement feature.

 

Substantiallyall of the Company’s outstanding share option awards that were granted prior toJanuary 1, 2005, have a net-cash settlement feature; the optionee has thechoice of exercising the net-cash settlement feature. The affected outstandingshare option awards largely take on the characteristics of liabilityinstruments rather than equity instruments. For the outstanding share optionawards that were amended and which were granted subsequent to 2001, the minimumexpense recognized for them will be their grant-date fair values.

 

TheCompany entered into a cash-settled equityswap agreement that establishes a cap on the Company’s cost associatedwith the affected outstanding share option awards. The following table sets outthe number of affected outstanding share option awards and the composition oftheir capped exercise date fair values.

 

****

 

35

----

 

notes to consolidated financial statements

 
| ** **                                                                                                                        | ** ** | **Affected share option awards granted for** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **As at December 31, 2008 ($ in millions except per affected outstanding** | ** ** | **Common Shares**                                                | ** ** | **Non-Voting Shares** | ** ** | ** ** | ** ** |
| **share option award)**                                                                                                 | ** ** | **prior to 2002**                                           | ** ** | **after 2001** | ** ** | **Total** | ** ** |
| Weighted average exercise price                                                                                                   |       | $                                                                     | 35.65      |   | $ | 30.51 |   | $ | 21.72 |   | $ | 27.13 |   |
| Weighted average grant date fair value                                                                                            |       | —                                                                |       | — |   | 6.70 |   | 3.08 |   |
|                                                                                                                              |       | 35.65                                                                 |       | 30.51 |   | 28.42 |   | 30.21 |   |
| Weighted average incremental share-based  compensation award expense arising from net-cash settlement feature                     |       | 18.61                                                                 |       | 24.64 |   | 26.73 |   | 24.82 |   |
| Exercise date fair value capped by  cash-settled equity swap agreement                                                            |       | $                                                                     | 54.26      |   | $ | 55.15 |   | $ | 55.15 |   | $ | 55.03 |   |
| Affected share option awards outstanding                                                                                          |       | 432,361                                                               |       | 1,359,036 |   | 1,530,251 |   | 3,321,648 |   |
| Notional amount (Note 5(h))                                                                                                       |       | $                                                                     | 7          |   | $ | 80 |   | $ | 90 |   | $ | 177 |   |

 

### **(c)**          Restricted stock units

### ** **

The Company uses restricted stock units as a form ofincentive compensation. Each restricted stock unit is equal in value to oneNon-Voting Share and the dividends that would have arisen thereon had it beenan issued and outstanding Non-Voting Share; the notional dividends are recordedas additional issuances of restricted stock units during the life of therestricted stock unit. The restricted stock units become payable when vestingis completed. The restricted stock units typically vest over a period of 33months (the requisite service period). The vesting method of restricted stockunits, which is determined on or before the date of grant, may be either cliffor graded. The associated liability is normally cash-settled.

 

Thefollowing table presents a summary of the activity related to the Company’srestricted stock units.

 
| ** **                                 | ** ** | **2008**                                             | ** ** | **2007**                               | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant date** | ** ** | **Number of restricted  stock units** | ** ** | **Weighted  average  grant date** | ** ** |
| **Years ended December 31** | ** ** | **Non-vested**                                       | ** ** | **Vested**                             | ** ** | **fair value** | ** ** | **Non-vested** | ** ** | **Vested** | ** ** | **fair value** | ** ** |
| Outstanding, beginning of period           |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-vested                                 | ** ** | **1,398,091**                                        | ** ** | **—**                             | ** ** | **$** | **49.19** |   | 1,518,613 |   | — |   | $ | 40.99 |   |
| Vested                                     | ** ** | **—**                                           | ** ** | **31,136**                             | ** ** | **48.74** |   | — |   | 37,251 |   | 38.85 |   |
| Issued                                     |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Initial award                              | ** ** | **997,219**                                          | ** ** | **—**                             | ** ** | **43.73** |   | 576,233 |   | — |   | 56.21 |   |
| In lieu of dividends                       | ** ** | **96,864**                                           | ** ** | **—**                             | ** ** | **39.42** |   | 52,132 |   | — |   | 55.84 |   |
| Vested                                     | ** ** | **(859,846**                                         | **)**      | **859,846**                            | ** ** | **44.66** |   | (662,437 | ) | 662,437 |   | 37.12 |   |
| Settled in cash                            | ** ** | **—**                                           | ** ** | **(864,097**                           | **)**      | **44.64** |   | — |   | (668,552 | ) | 36.67 |   |
| Forfeited and cancelled                    | ** ** | **(125,958**                                         | **)**      | **—**                             | ** ** | **44.69** |   | (86,450 | ) | — |   | 42.48 |   |
| Outstanding, end of period                 |       |                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-vested                                 | ** ** | **1,506,370**                                        | ** ** | **—**                             | ** ** | **48.15** |   | 1,398,091 |   | — |   | 49.19 |   |
| Vested                                     | ** ** | **—**                                           | ** ** | **26,885**                             | ** ** | **$** | **50.10** |   | — |   | 31,136 |   | $ | 48.74 |   |

 

With respect to certain issuances of restricted stockunits, the Company entered into cash-settled equity forward agreements that fixthe cost to the Company; that information, as well as a schedule of the Company’s non-vested restricted stockunits outstanding as at December 31, 2008, is set out in the following table.

 
| ** **                                | ** ** | **Number of  fixed-cost  restricted  stock units** | ** ** | **Cost fixed to the  Company per  restricted stock  unit** | ** ** | **Number of  variable-cost  restricted  stock units** | ** ** | **Total number of  non-vested  restricted stock  units** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Vesting in years ending December 31: |       |                                                         |       |                                                                                |       |                                                            |       |                                                                    |       |
| 2009                                      |       | 400,000                                                      |       | $                                                                                   | 64.26      |                                                            |       |                                                                    |       |   |
|                                      |       | 120,000                                                      |       | $                                                                                   | 47.11      |                                                            |       |                                                                    |       |   |
|                                      |       | 520,000                                                      |       |                                                                                |       | 196,888                                                         |       | 716,888                                                                 |       |
| 2010                                      |       | 600,000                                                      |       | $                                                                                   | 49.22      |                                                            | 189,482    |                                                                    | 789,482    |   |
|                                      |       | 1,120,000                                                    |       |                                                                                |       | 386,370                                                         |       | 1,506,370                                                               |       |

 

****

 

36

----

 

notes to consolidated financial statements

 

### **(d)**          Employee share purchase plan

### ** **

TheCompany has an employee share purchase plan under which eligible employees canpurchase Common Shares through regular payroll deductions by contributingbetween 1% and 10% of their pay. The Company contributed 45%, for employees upto a certain job classification, for every dollar contributed by an employee,to a maximum of 6% of employee pay; for more highly compensated jobclassifications, the Company contributed 40%. There are no vesting requirementsand the Company records its contributions as a component of operating expenses.

 

Duringthe fourth quarter of 2008, the Company reduced its contributions by 5% to 40%for employees up to a certain job classification and for more highlycompensated job classifications the Company reduced its contributions by 5% to35%.

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Employee contributions                                     | ** ** | **$**    | **88**     |     | $          | 81 |   |
| Company contributions                                      | ** ** | **36**   |       | 34       |       |
| ** **                                                 |       | **$**    | **124**    |     | $          | 115 |   |

 

Underthis plan, the Company has the option of offering shares from Treasury orhaving the trustee acquire shares in the stock market. For the years ended December 31,2008 and 2007, all Common Shares issued to employees under the plan werepurchased on the market at normal trading prices.

 

### **(e)**          Unrecognized, non-vested share-basedcompensation

### ** **

Asat December 31, 2008, compensation cost related to non-vested share-basedcompensation that has not yet been recognized is set out in the following tableand is expected to be recognized over a weighted average period of1.7 years (2007 — 1.7 years).

 
| **As at December 31 ****(millions)****(1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Share option awards                                             | ** ** | **$**    | **22**     |     | $          | 23 |   |
| Restricted stock units(2)                                       | ** ** | **29**   |       | 32       |       |
| ** **                                                      |       | **$**    | **51**     |     | $          | 55 |   |

 

----

(1)             These disclosures are not likely to be representativeof the effects on reported net income for future periods for the followingreasons: these amounts reflect an estimate of forfeitures; these amounts do notreflect any provision for future awards; these amounts do not reflect anyprovision for changes in the intrinsic value of vested restricted stock units;these amounts do not reflect any provision for the impacts of future, if any,modification of share option awards allowing for net-cash settlement; and fornon-vested restricted stock units, these amounts reflect intrinsic values as atthe statement of financial position dates.

(2)             The compensation cost that has not yet beenrecognized in respect of non-vested restricted stock units is calculated basedupon the intrinsic value of the non-vested restricted stock units as at thestatement of financial position dates, net of the impacts of associatedcash-settled equity forward agreements.

 

## 13            employee future benefits

##  

The Company has a number of defined benefit and definedcontribution plans providing pension, other retirement and post-employmentbenefits to most of its employees. Other benefit plans include a TELUS QuébecInc. retiree healthcare plan. The benefit plan(s) in which an employee isa participant reflects the general development of the Company.

 

*Pension Plan for Management and ProfessionalEmployees of TELUS Corporation*: This defined benefitpension plan, which ceased accepting new participants on January 1, 2006,and which comprises approximately one-quarter of the Company’s total accruedbenefit obligation, provides a non-contributory base level of pension benefits.Additionally, on a contributory basis, employees can annually choose increasedand/or enhanced levels of pension benefits over the base level of pensionbenefits. At an enhanced level of pension benefits, the defined benefit pensionplan has indexation of 100% of a specified cost-of-living index, to an annualmaximum of 2%. Pensionable remuneration is determined by the annualized averageof the best sixty consecutive months.

 

*TELUS Corporation Pension Plan*:Management and professional employees in Alberta who joined the Company priorto January 1, 2001, and certain unionized employees are covered by thiscontributory defined benefit pension plan, which comprises slightly more thanone-half of the Company’s total accrued benefit obligation. The plan contains asupplemental benefit account which may provide indexation up to 70% of theannual change of a specified cost-of-living index and pensionable remunerationis determined by the average of the best five years in the last ten yearspreceding retirement.

 

*TELUS Québec Defined Benefit Pension Plan (formerly the TELUSCorporation Pension Plan for Employees of TELUS Communications (Québec) Inc.)*:Any employee not governed by a collective agreement in Quebec who joined theCompany prior to April 1, 2006, any non-supervisory employee governed by acollective agreement prior to September 6, 2006, and certain otherunionized employees are covered by this contributory defined benefit pensionplan, which 

 

****

 

37

----

 

notes to consolidated financialstatements

 

comprises approximatelyone-tenth of the Company’s total accrued benefit obligation. The plan has noindexation and pensionable remuneration is determined by the average of thebest four years.

 

*TELUS Edmonton Pension Plan*:This contributory defined benefit pension plan ceased accepting newparticipants on January 1, 1998. Indexation is 60% of the annual change ofa specified cost-of-living index and pensionable remuneration is determined bythe annualized average of the best sixty consecutive months.

 

*Other defined benefit pensionplans*: In addition to the foregoing plans, the Company has non-registered,non-contributory supplementary defined benefit pension plans which have theeffect of maintaining the earned pension benefit once the allowable maximums inthe registered plans are attained. As is common with non-registered plans ofthis nature, these plans are funded only as benefits are paid.

 

The Company has three contributory, non-indexed pensionplans arising from a pre-merger acquisition which comprise less than 1% of theCompany’s total accrued benefit obligation; these plans ceased accepting newparticipants in September 1989.

 

*Other defined benefit plans*: Other defined benefitplans, which are all non-contributory, are comprised of a disability incomeplan, a healthcare plan for retired employees and a life insurance plan. Thehealthcare plan for retired employees and the life insurance plan ceasedaccepting new participants effective January 1, 1997. In connection withthe collective agreement signed in 2005, an external supplier commencedproviding a new long-term disability plan effective January 1, 2006. Theexisting disability income plan will continue to provide payments to previouslyapproved claimants and qualified eligible employees.

 

*Telecommunication Workers Pension Plan*: Certain employees in British Columbia arecovered by a union pension plan. Contributions are determined in accordancewith provisions of the negotiated labour contract and are generally based onemployee gross earnings.

 

*British Columbia Public Service Pension Plan*: Certain employees in British Columbia arecovered by a public service pension plan. Contributions are determined inaccordance with provisions of labour contracts negotiated by the Province ofBritish Columbia and are generally based on employee gross earnings.

 

*Defined contribution pension plan*: During the latter half of 2006, the Companyrevised its defined contribution pension plan offerings for 2007. Effective January 1,2007, the Company offered one defined contribution pension plan, which iscontributory, and is the only Company-sponsored pension plan available tonon-unionized and certain unionized employees joining the Company after thatdate. Generally, employees can annually choose to contribute to the plan at arate of between 3% and 6% of their pensionable earnings. The Company will match100% of the contributions of the employees up to 5% of their pensionableearnings and will match 80% of employee contributions greater than that.

 
| ** **                                                                              | ** ** | **2007 and 2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Contributions as a percentage of pensionable earnings** | ** ** | **Minimum**                 | ** ** | **Maximum** | ** ** |
| Employee contribution(1)                                                                |       | 3.0                         | %          | 6.0 | % |
| Employer contribution                                                                   |       | 3.0                         | %          | 5.8 | % |
| Total contribution(2)                                                                   |       | 6.0                         | %          | 11.8 | % |

 

----

(1)             Generally, membership in the definedcontribution pension plan is voluntary until an employee’s third year serviceanniversary.

(2)             In the event that annual contributions exceedallowable maximums, excess amounts are contributed to a non-registeredsupplementary defined contribution pension plan.

 

****

 

38

----

 

notes to consolidated financialstatements

 

### **(a)**          Defined benefit plans

### ** **

Informationconcerning the Company’s defined benefit plans, in aggregate, is as follows:

 
| ** **                                  | ** ** | **Pension benefit plans** |       | **Other benefit plans** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **(millions)**                              | ** ** | **2008**                            | ** ** | **2007**                          |       | **2008** | ** ** | **2007** | ** ** |
| Accrued benefit obligation:                 |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Balance at beginning of year                | ** ** | **$**                               | **6,347**  | ** **                        | $          | 6,580 |   | **$** | **73** | ** ** | $ | 72 |   |
| Current service cost                        | ** ** | **122**                             | ** ** | 136                               |       | **—** | ** ** | — |   |
| Interest cost                               | ** ** | **346**                             | ** ** | 327                               |       | **—** | ** ** | 7 |   |
| Benefits paid (c)                           | ** ** | **(298**                            | **)**      | (282                              | )          | **(6** | **)** | (6 | ) |
| Actuarial loss (gain)                       | ** ** | **(1,280**                          | **)**      | (408                              | )          | **(3** | **)** | — |   |
| Plan amendments                             | ** ** | **6**                               | ** ** | 27                                |       | **—** | ** ** | — |   |
| Transfers out                               | ** ** | **—**                          | ** ** | (33                               | )          | **—** | ** ** | — |   |
| Balance at end of year (d)-(e)              | ** ** | **5,243**                           | ** ** | 6,347                             |       | **64** | ** ** | 73 |   |
| Plan assets (g):                            |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Fair value at beginning of year             | ** ** | **6,913**                           | ** ** | 6,843                             |       | **37** | ** ** | 41 |   |
| Actual return on plan assets                | ** ** | **(1,101**                          | **)**      | 256                               |       | **1** | ** ** | 1 |   |
| Employer contributions (h)                  | ** ** | **102**                             | ** ** | 92                                |       | **2** | ** ** | 1 |   |
| Employee contributions                      | ** ** | **38**                              | ** ** | 37                                |       | **—** | ** ** | — |   |
| Benefits paid (c)                           | ** ** | **(298**                            | **)**      | (282                              | )          | **(6** | **)** | (6 | ) |
| Transfers out                               | ** ** | **—**                          | ** ** | (33                               | )          | **—** | ** ** | — |   |
| Fair value at end of year                   | ** ** | **5,654**                           | ** ** | 6,913                             |       | **34** | ** ** | 37 |   |
| Funded status – plan surplus (deficit) | ** ** | **411**                             | ** ** | 566                               |       | **(30** | **)** | (36 | ) |
| Unamortized net actuarial loss (gain)       | ** ** | **938**                             | ** ** | 629                               |       | **(12** | **)** | (10 | ) |
| Unamortized past service costs              | ** ** | **33**                              | ** ** | 31                                |       | **—** | ** ** | — |   |
| Unamortized transitional obligation (asset) | ** ** | **(150**                            | **)**      | (196                              | )          | **1** | ** ** | 2 |   |
| Accrued benefit asset (liability)           | ** ** | **$**                               | **1,232**  | ** **                        | $          | 1,030 |   | **$** | **(41** | **)** | $ | (44 | ) |

 

In 2001, theCompany sold substantially all of the TELUS Advertising Services directorybusiness and the TELUS Québec directory business. As a result of thistransaction, the pension obligation relating to the former TELUS AdvertisingServices employees, contained within the TELUS Corporation Pension Planand the TELUS Edmonton Pension Plan, were to be transferred upon receipt of therequisite regulatory approvals; such approvals were received November 14,2007. The TELUS Corporation Pension Plan pension obligation of$17 million and the TELUS Edmonton Pension Plan pension obligation of$4 million have been actuarially determined as at July 31, 2001. Inaccordance with the sale agreement, TELUS Corporation Pension Plan assetsof $17 million, plus interest accrued to November 30, 2007, of$9 million, were transferred along with the pension obligation; thecorresponding amounts in respect of the TELUS Edmonton Pension Plan were$4 million, plus interest accrued to November 30, 2007, of$2 million. Interest accrued, at 7% per annum, up to the date that theassets were transferred.

 

The accruedbenefit asset (liability) is reflected in the Consolidated Statements ofFinancial Position as follows:

 
| **As at December 31**** (millions)**            | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Pension benefit plans                                               | ** ** | **$**    | **1,232**  | ** ** | $          | 1,030 |   |
| Other benefit plans                                                 | ** ** | **(41**  | **)**      | (44        | )          |
| ** **                                                          |       | **$**    | **1,191**  | ** ** | $          | 986 |   |
| Presented on the Consolidated Statements of  Financial Position as: |       |     | ** ** |       |       |
| Deferred charges (Note 21(b))                                       | ** ** | **$**    | **1,401**  | ** ** | $          | 1,194 |   |
| Other long-term liabilities (Note 21(b))                            | ** ** | **(210** | **)**      | (208       | )          |
| ** **                                                          |       | **$**    | **1,191**  | ** ** | $          | 986 |   |

 

Themeasurement date used to determine the plan assets and accrued benefitobligation was December 31.

 

****

### ** **

39

----

### ** **

notes to consolidated financial statements

 

### **(b)**          Defined benefit plans – cost (recovery)

### ** **

TheCompany’s net defined benefit plan costs (recoveries) were as follows:

 
| ** **                                             | ** ** | **2008**                     | ** ** | **2007**                         | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** |
| **Pension benefit plans**                              |       |                         |       |                             |       |   | ** ** |   |   |   |   |   |   |
| Current service cost (employer portion)                | ** ** | **$**                        | **84**     | ** **                       | **$**      | **—** | ** ** | **$** | **84** | ** ** | $ | 99 |   | $ | — |   | $ | 99 |   |
| Interest cost                                          | ** ** | **346**                      | ** ** | **—**                       | ** ** | **346** | ** ** | 327 |   | — |   | 327 |   |
| Return on plan assets                                  | ** ** | **1,101**                    | ** ** | **(1,596**                       | **)**      | **(495** | **)** | (256 | ) | (236 | ) | (492 | ) |
| Past service costs                                     | ** ** | **—**                   | ** ** | **4**                            | ** ** | **4** | ** ** | — |   | 1 |   | 1 |   |
| Actuarial loss (gain)                                  | ** ** | **(1,280**                   | **)**      | **1,287**                        | ** ** | **7** | ** ** | (408 | ) | 419 |   | 11 |   |
| Amortization of transitional asset                     | ** ** | **—**                   | ** ** | **(46**                          | **)**      | **(46** | **)** | — |   | (42 | ) | (42 | ) |
| ** **                                             | ** ** | **$**                        | **251**    | ** **                       | **$**      | **(351** | **)** | **$** | **(100** | **)** | $ | (238 | ) | $ | 142 |   | $ | (96 | ) |

 

----

(1)    Accounting adjustments to allocate costs to different periods soas to recognize the long-term nature of employee future benefits.

 
| ** **                                             | ** ** | **2008**                     | ** ** | **2007**                         | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Years ended December 31  (millions)** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** | **Incurred in  period** | ** ** | **Matching  adjustments****(1)** | ** ** | **Recognized in  period** | ** ** |
| **Other benefit plans**                                |       |                         |       |                             |       |   | ** ** |   |   |   |   |   |   |
| Interest cost                                          | ** ** | **$**                        | **—** | ** **                       | **$**      | **—** | ** ** | **$** | **—** | ** ** | $ | 7 |   | $ | — |   | $ | 7 |   |
| Return on plan assets                                  | ** ** | **(1**                       | **)**      | **—**                       | ** ** | **(1** | **)** | (1 | ) | — |   | (1 | ) |
| Actuarial loss (gain)                                  | ** ** | **(3**                       | **)**      | **1**                            | ** ** | **(2** | **)** | — |   | (3 | ) | (3 | ) |
| Amortization of transitional obligation                | ** ** | **—**                   | ** ** | **1**                            | ** ** | **1** | ** ** | — |   | 1 |   | 1 |   |
| ** **                                             | ** ** | **$**                        | **(4**     | **)**                            | **$**      | **2** | ** ** | **$** | **(2** | **)** | $ | 6 |   | $ | (2 | ) | $ | 4 |   |

 

----

(1)    Accounting adjustments to allocate costs to different periods soas to recognize the long-term nature of employee future benefits.

 

### **(c)**          Benefit payments

 

Estimated future benefitpayments from the Company’s defined benefit plans, calculated as at December 31,2008, are as follows:

 
| **Years ending December 31 (millions)** | ** ** | **Pension  benefit plans** | ** ** | **Other benefit  plans** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| 2009                                                        |       | $                               | 318        |                          | $          | 6 |   |
| 2010                                                        |       | 325                             |       | 6                             |       |
| 2011                                                        |       | 343                             |       | 6                             |       |
| 2012                                                        |       | 359                             |       | 6                             |       |
| 2013                                                        |       | 376                             |       | 6                             |       |
| 2014-2018                                                   |       | 2,106                           |       | 27                            |       |
|                                                             |            |                                 |            |                               |            |  |  |

 

### **(d)**          Disaggregation of defined benefit pensionplan funding status

### ** **

Accrued benefit obligations are the actuarial presentvalues of benefits attributed to employee services rendered to a particulardate. The Company’sdisaggregation of defined benefit pension plans surplus and deficits atyear-end are as follows:

 
| ** **                                                                    | ** ** | **2008**                         | ** ** | **2007**             | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| **As at December 31**** (millions)**                      | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Pension plans that have plan assets in  excess of accrued benefit obligations | ** ** | **$**                            | **4,616**  | ** **           | **$**      | **5,177** | ** ** | **$** | **561** | ** ** | $ | 6,174 |   | $ | 6,913 |   | $ | 739 |   |
| Pension plans that have accrued benefit  obligations in excess of plan assets |       |                             |       |                 |       |   | ** ** |   |   |   |   |   |   |
| Funded                                                                        | ** ** | **486**                          | ** ** | **477**              | ** ** | **(9** | **)** | — |   | — |   | — |   |
| Unfunded                                                                      | ** ** | **141**                          | ** ** | **—**           | ** ** | **(141** | **)** | 173 |   | — |   | (173 | ) |
| ** **                                                                    | ** ** | **627**                          | ** ** | **477**              | ** ** | **(150** | **)** | 173 |   | — |   | (173 | ) |
| (see (a))                                                                     | ** ** | **$**                            | **5,243**  | ** **           | **$**      | **5,654** | ** ** | **$** | **411** | ** ** | $ | 6,347 |   | $ | 6,913 |   | $ | 566 |   |

 

As at December 31, 2008 and 2007, undrawn Letters ofCredit, further discussed in Note 18(d), secured certain of the unfundeddefined benefit pension plans.

 

****

### ** **

40

----

 

notes to consolidated financial statements

 

### **(e)**          Disaggregation of other defined benefitplan funding status

### ** **

Accrued benefit obligations are the actuarial presentvalues of benefits attributed to employee services rendered to a particulardate. The Company’sdisaggregation of other defined benefit plans surplus and deficits at year-endare as follows:

 
| ** **                                                                                   | ** ** | **2008**                         | ** ** | **2007**             | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| **As at December 31**** (millions)**                                     | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** | **Accrued  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Funded status -  plan surplus  (deficit)** | ** ** |
| Other benefit plans that have plan assets in  excess of accrued benefit obligations          | ** ** | **$**                            | **26**     | ** **           | **$**      | **34** | ** ** | **$** | **8** | ** ** | $ | 30 |   | $ | 37 |   | $ | 7 |   |
| Unfunded other benefit plans that have  accrued benefit obligations in excess of plan assets | ** ** | **38**                           | ** ** | **—**           | ** ** | **(38** | **)** | 43 |   | — |   | (43 | ) |
| (see (a))                                                                                    | ** ** | **$**                            | **64**     | ** **           | **$**      | **34** | ** ** | **$** | **(30** | **)** | $ | 73 |   | $ | 37 |   | $ | (36 | ) |

 

### **(f)**            Accumulatedpension benefit obligations

### ** **

Accumulated benefit obligationsdiffer from accrued benefit obligations in that accumulated benefit obligationsdo not include assumptions about future compensation levels. The Company’sdisaggregation of defined pension benefit plans accumulated benefit obligationsand plan assets at year-end are as follows:

 
| ** **                                                                           | ** ** | **2008**                             | ** ** | **2007**             | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **As at December 31**** (millions)**                             | ** ** | **Accumulated  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Difference** | ** ** | **Accumulated  benefit  obligation** | ** ** | **Plan assets** | ** ** | **Difference** | ** ** |
| Pension plans that have plan assets in  excess of accumulated benefit obligations    | ** ** | **$**                                | **4,899**  | ** **           | **$**      | **5,654** | ** ** | **$** | **755** | ** ** | $ | 5,830 |   | $ | 6,913 |   | $ | 1,083 |   |
| Pension plans that have accumulated benefit  obligations in excess of plan assets(1) | ** ** | **129**                              | ** ** | **—**           | ** ** | **(129** | **)** | 160 |   | — |   | (160 | ) |
| ** **                                                                           | ** ** | **$**                                | **5,028**  | ** **           | **$**      | **5,654** | ** ** | **$** | **626** | ** ** | $ | 5,990 |   | $ | 6,913 |   | $ | 923 |   |

 

----

(1)       For both yearspresented, only unfunded pension plans had accumulated benefit obligations inexcess of plan assets.

 

### **(g)**         Plan investment strategies and policies

### ** **

The Company’s primary goal forthe defined benefit plans is to ensure the security of the retirement incomeand other benefits of the plan members and their beneficiaries. A secondarygoal of the Company is to maximize the long-term rate of return of the definedbenefit plans’ assets within a level of risk acceptable to the Company.

 

*Risk management*: TheCompany considers absolute risk (the risk of contribution increases, inadequateplan surplus and unfunded obligations) to be more important than relativereturn risk. Accordingly, the defined benefit plans’ designs, the nature andmaturity of defined benefit obligations and characteristics of the plans’memberships significantly influence investment strategies and policies. TheCompany manages risk through specifying allowable and prohibited investmenttypes, setting diversification strategies and determining target assetallocations.

 

*Allowable and prohibited investment types*:Allowable and prohibited investment types, along with associated guidelines andlimits, are set out in each fund’s *PensionBenefits Standards Act, 1985,* required Statement of InvestmentPolicies and Procedures (SIP&P), which is reviewed and approved annually bythe designated governing fiduciary. The SIP&P guidelines and limits arefurther governed by the *Pension BenefitsStandards Regulations, 1985*’s permitted investments and lendinglimits. As well as conventional investments, each fund’s SIP&P may providefor the use of derivative products to facilitate investment operations and tomanage risk provided that no short position is taken, no use of leverage ismade and there is no violation of guidelines and limits established in theSIP&P. Internally managed funds are prohibited from increasinggrandfathered investments in securities of the Company; grandfatheredinvestments were made prior to the merger of BC TELECOM Inc. andTELUS Corporation, the Company’s predecessors. Externally managed fundsare permitted to invest in securities of the Company, provided that theinvestments are consistent with the funds’ mandate and are in compliance withthe relevant SIP&P.

 

*Diversification*: TheCompany’s strategy for equity security investments is to be broadly diversifiedacross individual securities, industry sectors and geographical regions. Ameaningful portion (15-25% of total plans’ assets) of the investment in equitysecurities is allocated to foreign equity securities with the intent of furtherincreasing the diversification of the plans’ assets. Debt securities mayinclude a meaningful allocation to mortgages with the objective of enhancingcash flow and providing greater scope for the management of the bond componentof the plans’ assets. Debt securities also may include real return bonds toprovide inflation protection, consistent with the indexed nature of somedefined benefit 

 

****

 

41

----

 

notes to consolidated financial statements

 

obligations. Real estateinvestments are used to provide diversification of plans’ assets, potentiallong-term inflation hedging and comparatively stable investment income.

 

*Relationship between plan assets and benefitobligations*: With the objective of lowering itslong-term costs of defined benefit plans, the Company purposely mismatches planassets and benefit obligations. This mismatching is implemented by includingequity investments in the long-term asset mix as well as fixed incomesecurities and mortgages with durations that differ from the benefitobligations. Compensation for liquidity issues that may have otherwise arisenfrom mismatching of plan assets and benefit obligations comes from broadlydiversified investment holdings (including cash and short-term investmentholdings) and cash flows from dividends, interest and rents from diversifiedinvestment holdings.

 

*Asset allocations*:Information concerning the Company’s defined benefit plans’ target assetallocation and actual asset allocation is as follows:

 
| ** **        | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans**                                           | ** ** |
|-------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **        | ** ** | **Target  allocation**              |       | **Percentage of plan assets  at end of year** | ** ** | **Target  allocation** |   | **Percentage of plan assets  at end of year** | ** ** |
| ** **        | ** ** | **2009**                            |       | **2008**                                                                    | ** ** | **2007** | ** ** | **2009** |   | **2008** | ** ** | **2007** | ** ** |
| Equity securities |       | 45-55                               | %          | **47**                                                                      | **%**      | 58 | % | — |   | **—** | ** ** | — |   |
| Debt securities   |       | 35-45                               | %          | **45**                                                                      | **%**      | 36 | % | — |   | **—** | ** ** | — |   |
| Real estate       |       | 4-8                                 | %          | **6**                                                                       | **%**      | 5 | % | — |   | **—** | ** ** | — |   |
| Other             |       | 0-2                                 | %          | **2**                                                                       | **%**      | 1 | % | 100 | % | **100** | **%** | 100 | % |
| ** **        |       |                                |       | **100**                                                                     | **%**      | 100 | % |   |   | **100** | **%** | 100 | % |

 

At December 31,2008, shares of TELUS Corporation accounted for less than 1% of the assetsheld in the pension and other benefit trusts administered by the Company.

 

### **(h)**         Employer contributions

### ** **

The determination of theminimum funding amounts for substantially all of the Company’s registereddefined benefit pension plans is governed by the *PensionBenefits Standards Act, 1985* which requires that, in addition tocurrent service costs being funded, both going-concern and solvency valuationsbe performed on a specified periodic basis. Any excess of plan assets over planliabilities determined in the going-concern valuation reduces the Company’sminimum funding requirement of current service costs, but may not reduce therequirement to an amount less than the employees’ contributions. Thegoing-concern valuation generally determines the excess (if any) of a plan’sassets over its liabilities, determined on a projected benefit basis. Thesolvency valuation generally requires that a plan’s liabilities, determined onthe basis that the plan is terminated on the valuation date, in excess of itsassets (if any) be funded, at a minimum, in equal annual amounts over a periodnot exceeding five years.

 

The bestestimates of fiscal 2009 employer contributions to the Company’s definedbenefit plans are approximately $211 million and $2 million fordefined benefit pension plans and other defined benefit plans, respectively.These estimates are based upon the mid-year 2008 annual funding reports thatwere prepared by actuaries using December 31, 2007, actuarial valuations.The funding reports are based on the pension plans’ fiscal years, which arecalendar years. The next annual funding valuations are expected to be preparedmid-year 2009.

 

### **(i)**            Assumptions

### ** **

Management is required to makesignificant estimates about certain actuarial and economic assumptions to beused in determining defined benefit pension costs, accrued benefit obligationsand pension plan assets. These significant estimates are of a long-term nature,which is consistent with the nature of employee future benefits.

 

The discountrate, which is used to determine the accrued benefit obligation, is based onthe yield on long-term, high-quality fixed term investments, and is setannually. The expected long-term rate of return is based upon forecastedreturns of the major asset categories and weighted by the plans’ target assetallocations. Future increases in compensation are based upon the currentbenefits policies and economic forecasts.

 

Thesignificant weighted average actuarial assumptions arising from these estimatesand adopted in measuring the Company’s accrued benefit obligations are asfollows:

 

****

 

42

----

 

notes to consolidated financialstatements

 
| ** **                                                                   | ** ** | **Pension benefit plans** |       | **Other benefit plans** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                            | ** ** | **2007**                          |       | **2008** | ** ** | **2007** | ** ** |
| Discount rate used to determine:                                             |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Net benefit costs for the year ended  December 31                       | ** ** | **5.50**                            | **%**      | 5.00                              | %          | **5.36** | **%** | 4.86 | % |
| Accrued benefit obligation as at  December 31                           | ** ** | **7.25**                            | **%**      | 5.50                              | %          | **7.11** | **%** | 5.36 | % |
| Expected long-term rate of return(1) on plan assets used  to determine: |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Net benefit costs for the year ended  December 31                       | ** ** | **7.25**                            | **%**      | 7.25                              | %          | **3.00** | **%** | 3.00 | % |
| Accrued benefit obligation as at December 31                            | ** ** | **7.25**                            | **%**      | 7.25                              | %          | **3.00** | **%** | 3.00 | % |
| Rate of future increases in compensation  used to determine:                 |       |                                | ** ** |                              |       |   | ** ** |   |   |
| Net benefit costs for the year ended  December 31                       | ** ** | **3.00**                            | **%**      | 3.00                              | %          | **—** | ** ** | — |   |
| Accrued benefit obligation as at  December 31                           | ** ** | **3.00**                            | **%**      | 3.00                              | %          | **—** | ** ** | — |   |

 

----

(1)             The expected long-term rate of return is basedupon forecasted returns of the major asset categories and weighted by theplans’ target asset allocations (see (g)). Forecasted returns arise from theCompany’s ongoing review of trends, economic conditions, data provided byactuaries and updating of underlying historical information.

 
| ** **                                                              | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **2008 sensitivity of key assumptions  (millions)** | ** ** | **Change in  obligation**      | ** ** | **Change in  expense**       | ** ** | **Change in  obligation** | ** ** | **Change in  expense** | ** ** |
| Impact of hypothetical 25 basis point  decrease(1) in:             |       |                                |       |                              |       |   |   |   |   |
| Discount rate                                                           |       | $                                   | 151        |                              | $          | 10 |   | $ | 1 |   | $ | — |   |
| Expected long-term rate of return on plan  assets                       |       |                                |       | $                                 | 17         |   |   |   | $ | — |   |
| Rate of future increases in compensation                                |       | $                                   | 19         |                              | $          | 4 |   | $ | — |   | $ | — |   |

 

----

(1)             These sensitivities are hypothetical andshould be used with caution. Favourable hypothetical changes in the assumptionsresult in decreased amounts, and unfavourable hypothetical changes in theassumptions result in increased amounts, of the obligations and expenses.Changes in amounts based on a 25 basis point variation in assumptions generallycannot be extrapolated because the relationship of the change in assumption tothe change in amounts may not be linear. Also, in this table, the effect of a variationin a particular assumption on the change in obligation or change in expense iscalculated without changing any other assumption; in reality, changes in onefactor may result in changes in another (for example, increases in discountrates may result in increased expectations about the long-term rate of returnon plan assets), which might magnify or counteract the sensitivities.

 

### **(j)**            Definedcontribution plans

### ** **

The Company’s total defined contribution pensionplan costs recognized were as follows:

 
| **Years ended December 31 (millions)**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Union pension plan and public service  pension plan contributions | ** ** | **$**    | **31**     |     | $          | 31 |   |
| Other defined contribution pension plans                          | ** ** | **32**   |       | 26       |       |
| ** **                                                        |       | **$**    | **63**     |     | $          | 57 |   |

 

## 14            accounts receivable

##  

OnJuly 26, 2002, TELUS Communications Inc., a wholly owned subsidiary ofTELUS, entered into an agreement, which was amended September 30, 2002, March 1,2006, November 30, 2006, March 31, 2008, and September 12, 2008,with an arm’s-length securitization trust associated with a major Schedule Ibank under which TELUS Communications Inc. is able to sell an interest incertain of its trade receivables up to a maximum of $650 million. This“revolving-period” securitization agreement had an initial term ending July 18,2007; the November 30, 2006, amendment resulted in the term being extendedto July 18, 2008; the March 31, 2008, amendment resulted in the termbeing extended to July 17, 2009.

 

Asa result of selling the interest in certain of the trade receivables on a fullyserviced basis, a servicing liability is recognized on the date of sale and is,in turn, amortized to earnings over the expected life of the trade receivables.

 

TELUSCommunications Inc. is required to maintain at least a BBB (low) creditrating by Dominion Bond Rating Service or the securitization trust may requirethe sale program to be wound down prior to the end of the term; at December 31,2008, the rating was A (low).

 
| **As at December 31****(millions)** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------------------------------|------------|----------|------------|------------|------------|
| Total managed portfolio                            | ** ** | **$**    | **1,272**  | ** ** | $          | 1,222 |   |
| Securitized receivables                            | ** ** | **(346** | **)**      | (570       | )          |
| Retained interest in receivables sold              | ** ** | **40**   | ** ** | 59         |       |
| Receivables held                                   | ** ** | **$**    | **966**    | ** ** | $          | 711 |   |

 

****

 

43

----

 

notes to consolidated financialstatements

 

For the year ended December 31, 2008, the Company recognizedcomposite losses of $11 million (2007 — $21 million) on the sale ofreceivables arising from the securitization.

 

Cashflows from the securitization were as follows:

 
| **Years ended December 31 (millions)**                | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Cumulative proceeds from securitization,  beginning of period             | ** ** | **$**    | **500**    | ** ** | $          | 500 |   |
| Proceeds from new securitizations                                         | ** ** | **150**  | ** ** | 720        |       |
| Securitization reduction payments                                         | ** ** | **(350** | **)**      | (720       | )          |
| Cumulative proceeds from securitization,  end of period                   | ** ** | **$**    | **300**    | ** ** | $          | 500 |   |
| Proceeds from collections reinvested in  revolving-period securitizations | ** ** | **$**    | **3,105**  | ** ** | $          | 3,947 |   |
| Proceeds from collections pertaining to  retained interest                | ** ** | **$**    | **382**    | ** ** | $          | 477 |   |

 

Thekey economic assumptions used to determine the loss on sale of receivables, thefuture cash flows and fair values attributed to the retained interest, asfurther discussed in Note 1(n), were as follows:

 
| **Years ended December 31**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected credit losses as a percentage of  accounts receivable sold |       | **1.2**  | **%**      | 1.1      | %          |
| Weighted average life of the receivables sold  (days)               | ** ** | **33**   | ** ** | 37       |       |
| Effective annual discount rate                                      | ** ** | **3.5**  | **%**      | 5.0      | %          |
| Servicing                                                           | ** ** | **1.0**  | **%**      | 1.0      | %          |

 

Generally,the sold trade receivables do not experience prepayments.

 

AtDecember 31, 2008, key economic assumptions and the sensitivity of thecurrent fair value of residual cash flows to immediate 10% and 20% changes inthose assumptions were as follows:

 
| ** **                                                          | ** ** | ** ** | ** ** | **Hypothetical change  in assumptions****(1)** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| **($ in millions)**                                       | ** ** | **2008**   | ** ** | **10%**                                                  | ** ** | **20%** | ** ** |
| Carrying amount/fair value of future cash  flows                    | ** ** | **$**      | **40**     |                                                     |       |   |   |   |
| Expected credit losses as a percentage of  accounts receivable sold |       |       |       | $                                                        | —     |   | $ | 1 |   |
| Weighted average life of the receivables  sold (days)               |       |       |       | $                                                        | —     |   | $ | — |   |
| Effective annual discount rate                                      |       |       |       | $                                                        | —     |   | $ | — |   |
|                                                                     |            |            |            |                                                          |            |  |  |  |  |  |

 

----

(1)             These sensitivities are hypothetical andshould be used with caution. Favourable hypothetical changes in the assumptionsresult in an increased value, and unfavourable hypothetical changes in theassumptions result in a decreased value, of the retained interest inreceivables sold. As the figures indicate, changes in fair value based on a 10%variation in assumptions generally cannot be extrapolated because therelationship of the change in assumption to the change in fair value may not belinear. Also, in this table, the effect of a variation in a particularassumption on the fair value of the retained interest is calculated withoutchanging any other assumption; in reality, changes in one factor may result inchanges in another (for example, increases in market interest rates may resultin increased credit losses), which might magnify or counteract thesensitivities.

 

****

 

44

----

 

notes to consolidated financialstatements

 

15                                    capitalassets

 

### **(a)**          Capital assets, net

 
| ** **                                                 | ** ** | **2008**   | ** ** | **2007**                                               | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| **As at December 31 ****(millions)**   | ** ** | **Cost**   | ** ** | **Accumulated  depreciation  and   amortization** | ** ** | **Net book   value** | ** ** | **Cost** | ** ** | **Accumulated   depreciation  and   amortization** | ** ** | **Net book   value** | ** ** |
| Property, plant, equipment and other                  |       | ** ** |       | ** **                                             |       | ** ** |   |   |   |   |   |   |   |
| Network assets                                             | ** ** | **$**      | **20,609** |                                                   | **$**      | **15,119** |   | **$** | **5,490** |   | $ | 19,848 |   | $ | 14,345 |   | $ | 5,503 |   |
| Buildings and leasehold improvements                       | ** ** | **2,110**  | ** ** | **1,232**                                              | ** ** | **878** |   | 1,993 |   | 1,113 |   | 880 |   |
| Assets under capital lease                                 | ** ** | **15**     | ** ** | **9**                                                  | ** ** | **6** |   | 18 |   | 12 |   | 6 |   |
| Other                                                      | ** ** | **1,681**  | ** ** | **1,272**                                              | ** ** | **409** |   | 1,549 |   | 1,165 |   | 384 |   |
| Land                                                       | ** ** | **49**     | ** ** | **—**                                             | ** ** | **49** |   | 48 |   | — |   | 48 |   |
| Assets under construction                                  | ** ** | **485**    | ** ** | **—**                                             | ** ** | **485** |   | 375 |   | — |   | 375 |   |
| ** **                                                 | ** ** | **24,949** | ** ** | **17,632**                                             | ** ** | **7,317** |   | 23,831 |   | 16,635 |   | 7,196 |   |
| Intangible assets subject to amortization Subscriber  base |       | **245**    |       | **46**                                                 |       | **199** |   | 250 |   | 44 |   | 206 |   |
| Customer contracts and the related customer  relationships | ** ** | **138**    | ** ** | **13**                                                 | ** ** | **125** |   | — |   | — |   | — |   |
| Software                                                   | ** ** | **2,082**  | ** ** | **1,314**                                              | ** ** | **768** |   | 1,761 |   | 1,243 |   | 518 |   |
| Access to rights-of-way and other                          | ** ** | **103**    | ** ** | **75**                                                 | ** ** | **28** |   | 118 |   | 67 |   | 51 |   |
| Assets under construction                                  | ** ** | **197**    | ** ** | **—**                                             | ** ** | **197** |   | 184 |   | — |   | 184 |   |
| ** **                                                 | ** ** | **2,765**  | ** ** | **1,448**                                              | ** ** | **1,317** |   | 2,313 |   | 1,354 |   | 959 |   |
| Intangible assets with indefinite lives                    |       | ** ** |       | ** **                                             |       | ** ** |   |   |   |   |   |   |   |
| Spectrum licences(1)                                       |       | **4,867**  |       | **1,018**                                              |       | **3,849** |   | 3,985 |   | 1,018 |   | 2,967 |   |
| ** **                                                 | ** ** | **$**      | **32,581** | ** **                                             | **$**      | **20,098** | ** ** | **$** | **12,483** |   | $ | 30,129 |   | $ | 19,007 |   | $ | 11,122 |   |

 

----

(1)             Accumulatedamortization of spectrum licences is amortization recorded prior to 2002.

 

Thefollowing table presents items included in capital expenditures andacquisitions. Additions of intangible assets subject to amortization includeamounts reclassified from assets under construction.

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Additions of intangible assets                             |       |     |       |     |       |
| – Subject to amortization                             |       |     |       |     |       |
| – Included in capital expenditures                    | ** ** | **$**    | **332**    |     | $          | 513 |   |
| – Included in acquisitions (see Note 16(b))           | ** ** | **326**  |       | —   |       |
| ** **                                                 |       | **658**  |       | 513      |       |
| – With indefinite lives                               | ** ** | **882**  |       | —   |       |
| ** **                                                 |       | **$**    | **1,540**  |     | $          | 513 |   |

 

Thefollowing table presents items included in capital expenditures.

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Capitalized internal labour costs                          | ** ** | **$**    | **371**    |     | $          | 335 |   |
|                                                            |            |          |            |          |            |  |  |

 

### **(b)**          Intangible assets subject to amortization

### ** **

Estimatedaggregate amortization expense for intangible assets subject to amortization,calculated upon such assets held as at December 31, 2008, for each of thenext five fiscal years is as follows:

 
| **Years ending December 31 (millions)** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
| 2009                                                        | ** ** | **$**      | **344**    | ** ** |
| 2010                                                        | ** ** | **252**    | ** ** |
| 2011                                                        | ** ** | **152**    | ** ** |
| 2012                                                        | ** ** | **81**     | ** ** |
| 2013                                                        | ** ** | **66**     | ** ** |
|                                                             |            |            |            |  |

 

****

 

45

----

### ** **

notes to consolidated financialstatements

 

### **(c)**          Intangible assets with indefinite lives

### ** **

Asreferred to in Note 1(b) and Note 1(f), the carrying value ofintangible assets with indefinite lives, and goodwill, is periodically testedfor impairment and this test represents a significant estimate for the Company.There is a material degree of uncertainty with respect to this estimate giventhe necessity of making key economic assumptions about the future. The Companyconsiders a range of reasonably possible amounts and decides upon an amountthat represents management’s best estimate. If the future was to adverselydiffer from management’s best estimate of key economic assumptions andassociated cash flows were to be materially adversely affected, the Companycould potentially experience future material impairment charges in respect ofits intangible assets with indefinite lives and goodwill.

 

Consistentwith current industry-specific valuation methods, a combination of thediscounted cash flow approach, the market-comparable approach and analyticalreview of industry and Company-specific facts is used in determining the fairvalue of its spectrum licences and goodwill. The discounted cash flowmethodology uses management’s best estimate of the cash flows and a discountrate established by calculating a weighted average cost of capital for eachreporting unit. The market-comparable approach uses current (at the time oftest) market consensus estimates and equity trading prices for U.S. andCanadian firms in the same industry. In addition, the Company ensures that thecombination of the valuations of the reporting units is reasonable based oncurrent market values of the Company.

 

Sensitivitytesting was conducted as a part of the December 2008 annual test. Stresstesting included moderate declines in annual cash flows with all otherassumptions being held constant; this too resulted in the Company continuing tobe able to recover the carrying value of its intangible assets with indefinitelives and goodwill for the foreseeable future.

 

## 16            goodwill

##  

### **(a)**          Changes in goodwill

 
| **Years ended December 31 (millions)**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period                                        | ** ** | **$**    | **3,168**  |     | $          | 3,170 |   |
| Goodwill arising from current period  acquisition                   | ** ** | **396**  |       | —   |       |
| Other                                                               | ** ** | **3**    |       | —   |       |
| Foreign exchange on goodwill of  self-sustaining foreign operations | ** ** | **(3**   | **)**      | (2       | )          |
| Balance, end of period                                              | ** ** | **$**    | **3,564**  |     | $          | 3,168 |   |

 

### **(b)**          Business acquisitions

### ** **

*Emergis Inc.:*On November 29, 2007, the Company announced that it had agreed tooffer to acquire 100% of the outstanding shares of Emergis Inc. for $8.25per common share by way of take-over bid (in total, an initially estimatedpurchase price of approximately $763 million on a fully diluted basis).Emergis Inc. is a business process outsourcer, based in Canada, with afocus on healthcare and financial services sectors, two of the four keyindustries the Company’s Business Solutions team has invested in developingexpertise in (the other two being energy and the public sector). The Companybelieves that its national sales and marketing capabilities will enhance growthin Emergis Inc. solutions, particularly in light of the complementarynature of the parties’ businesses and customer bases.

 

Asat December 31, 2007, the Company had made market purchases of 1,017,000Emergis Inc. common shares for $8 million, as disclosed in the Company’spress releases. On January 17, 2008, the Company drew $500 million ofbankers’ acceptances on its credit facilities, issued incremental commercialpaper and, including utilization of cash on hand, remitted $743 million tothe depository in payment for:

 

·                  the84,876,494 Emergis Inc. common shares (representing approximately 94% ofthe outstanding common shares of Emergis Inc. on a fully diluted basis) thatwere validly deposited to the Company’s offer; and

 

·                  theremaining outstanding common shares of Emergis Inc. which the Companyacquired on January 18, 2008, utilizing the compulsory acquisitionprovisions of the *Canada Business Corporations Act*.

 

Theprimary factor that contributed to a purchase price that resulted in therecognition of goodwill is the degree of net tangible assets and net intangibleassets relative to the earnings capacity of the acquired business.Emergis Inc.’s results of operations are included in the Company’sWireline segment effective January 17, 2008. The amounts assigned togoodwill are not expected to be deductible for tax purposes. Acquiredintangible assets are not expected to have significant residual values.

 

****

 

46

----

 

notes to consolidated financial statements

 
| **As at January 16, 2008 (millions)**                          | ** ** | **Preliminary****(1)   ****purchase price  amount   assigned** | ** ** | **Adjustment** | ** ** | **Purchase price  amount **

**assigned** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------|------------|-----------------------------------------------------|------------|
| **Assets**                                                                              |       |                                                                          |       |           |       |                                                |       |
| Current assets                                                                          |       | $                                                                             | 113        |           | $          | 1                                                   |       | $ | 114 |   |
| Capital assets                                                                          |       |                                                                          |       |           |       |                                                |       |
| Property, plant, equipment and other                                                    |       | 19                                                                            |       | (1             | )          | 18                                                  |       |
| Intangible assets subject to amortization(2)                                            |       |                                                                          |       |           |       |                                                |       |
| Customer contracts and the related customer  relationships                              |       | 135                                                                           |       | 3              |       | 138                                                 |       |
| Software                                                                                |       | 186                                                                           |       | —         |       | 186                                                 |       |
| Other                                                                                   |       | 2                                                                             |       | —         |       | 2                                                   |       |
|                                                                                    |       | 323                                                                           |       | 3              |       | 326                                                 |       |
|                                                                                    |       | 342                                                                           |       | 2              |       | 344                                                 |       |
| Other assets                                                                            |       | 5                                                                             |       | 1              |       | 6                                                   |       |
| Goodwill                                                                                |       | 366                                                                           |       | 30             |       | 396                                                 |       |
|                                                                                    |       | $                                                                             | 826        |           | $          | 34                                                  |       | $ | 860 |   |
| **Liabilities**                                                                         |       |                                                                          |       |           |       |                                                |       |
| Current liabilities                                                                     |       | $                                                                             | 52         |           | $          | 40                                                  |       | $ | 92 |   |
| Long-term debt                                                                          |       | 3                                                                             |       | (1             | )          | 2                                                   |       |
| Other long-term liabilities                                                             |       | 1                                                                             |       | 3              |       | 4                                                   |       |
| Future income taxes                                                                     |       | 25                                                                            |       | (10            | )          | 15                                                  |       |
|                                                                                    |       | 81                                                                            |       | 32             |       | 113                                                 |       |
| **Purchase price**                                                                      |       |                                                                          |       |           |       |                                                |       |
| Market purchase of shares prior to closing                                              |       | 8                                                                             |       | —         |       | 8                                                   |       |
| Remitted to depository (net of amounts for  market purchase of shares prior to closing) |       | 735                                                                           |       | —         |       | 735                                                 |       |
|                                                                                    |       | 743                                                                           |       | —         |       | 743                                                 |       |
| Direct costs of the business combination                                                |       | 2                                                                             |       | 2              |       | 4                                                   |       |
|                                                                                    |       | 745                                                                           |       | 2              |       | 747                                                 |       |
|                                                                                    |       | $                                                                             | 826        |           | $          | 34                                                  |       | $ | 860 |   |

 

----

(1)             The purchase price allocation had not beenfinalized as of the date of issuance of the Company’s December 31, 2007,consolidated financial statements, when these amounts were first reported. Asis customary in a business acquisition transaction, until the time ofacquisition of control, the Company did not have full access to Emergis Inc.’sbooks and records. Upon having sufficient time to adequately review EmergisInc.’s books and records, the Company finalized its purchase price allocation.

 

(2)             Customer contracts and the related customerrelationships and software are being amortized over amortization periods of 10years and 5 years, respectively.

 

*Fastvibe Corporation:* No goodwill addition arose from the January 29, 2008,$4 million cash acquisition of Fastvibe Corporation, a provider of webstreaming solutions. Fastvibe Corporation’s results of operations are includedin the Company’s Wireline segment effective January 29, 2008.

 

*Pro forma supplemental information:* The following pro forma supplementalinformation represents certain results of operations as if the businessacquisitions noted above had been completed as at the beginning of the fiscalyears presented.

 
| **Years ended December 31**                  | ** ** | **2008**             | ** ** | **2007**           | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **(millions except per share amounts)** | ** ** | **As reported** | ** ** | **Pro forma** | ** ** | **As reported** | ** ** | **Pro forma** | ** ** |
| Operating revenues                                          | ** ** | **$**                | **9,653**  | ** **         | **$**      | **9,660** |   | $ | 9,074 |   | $ | 9,268 |   |
| Net income                                                  | ** ** | **$**                | **1,128**  | ** **         | **$**      | **1,123** |   | $ | 1,258 |   | $ | 1,215 |   |
| Net income per Common Share and Non-Voting  Share           |       |                 |       |               |       |   |   |   |   |
| – Basic                                                | ** ** | **$**                | **3.52**   | ** **         | **$**      | **3.50** |   | $ | 3.79 |   | $ | 3.66 |   |
| – Diluted                                              | ** ** | **$**                | **3.51**   | ** **         | **$**      | **3.49** |   | $ | 3.76 |   | $ | 3.64 |   |

 

The pro forma supplemental information is based on estimates andassumptions which are believed to be reasonable. The pro forma supplementalinformation is not necessarily indicative of the Company’s consolidatedfinancial results in future periods or the results that actually would havebeen realized had the business acquisition been completed at the beginning ofthe periods presented. The pro forma supplemental information includesincremental intangible asset amortization, financing and other charges as aresult of the acquisition, net of the related tax effects.

 

****

 

47

----

 

notes to consolidated financialstatements

 

### **(c)**          Other transactions; other

### ** **

*TELUSInternational Philippines Inc.:*  In 2005, the Company acquired,for cash, an effective 52.5% economic interest in TELUS InternationalPhilippines Inc., a business process outsourcing company. The acquisition waseffected in two steps: one on February 15, 2005, for an effective 49%economic interest and one on May 13, 2005, for an effective 3.5% economicinterest. The initial effective 49% economic interest resulted in the Companycontrolling TELUS International Philippines Inc. as the Company controlled, butdid not wholly own, an intermediate holding company which, in turn, controlled,but did not wholly own, TELUS International Philippines Inc. This investmentwas made with a view to enhancing the Company’s competitiveness in contactcentre offerings.

 

Inthe second half of 2006, the Company increased its total effective economicinterest in the entity to 97.4% and in the third quarter of 2008, to 100%. Noneof the resulting 2008 goodwill addition of $3 million arising from the$3 million transaction is expected to be deductible for tax purposes.

 

Theprimary factor that contributed to a purchase price that resulted in therecognition of goodwill is the low degree of net tangible assets in theindustry relative to the market value of established Asian operations. TELUSInternational Philippines Inc.’s results have been included in the Company’sConsolidated Statements of Income and Other Comprehensive Income and theCompany’s Wireline segment since the acquisition of control on February 15,2005.

 

*Transactel Barbados, Inc.:* On December 22, 2008, the Companyacquired a direct 29.99% economic interest in Transactel Barbados Inc., abusiness process outsourcing and call centre company with facilities in threeCentral American countries, for $19 million cash. Additional contingentconsideration could become payable depending upon Transactel Barbados Inc.earnings for the year ending December 31, 2011.

 

TheCompany has provided two written put options to the vendor of Transactel BarbadosInc. The first written put option becomes exercisable on December 31,2009, expiring on June 30, 2011, and allows the vendor to put up to afurther 21.01% economic interest to the Company (the Company’s effectiveeconomic interest in Transactel Barbados Inc. would become 51% assuming thewritten put option is exercised in full). The second written put option becomesexercisable on December 31, 2010, with no expiry, and allows the vendor toput whatever interest is not put under the first written put option plus up toan incremental 44% economic interest to the Company (the Company’s effectiveeconomic interest in Transactel Barbados Inc. would become 95% assuming thatthe written put option is exercised in full). The written put options set outthe share pricing methodology, which is dependent upon Transactel Barbados Inc.future earnings.

 

 The vendor has provided the Company with twopurchased call options which substantially mirror the written put optionsexcept that they are only exercisable upon achieving certain business growthtargets.

 

TheCompany currently accounts for its investment in Transactel Barbados Inc. usingthe equity method.

 

Theinvestment was made with a view to enhancing the Company’s business processoutsourcing capacity particularly regarding Spanish language capabilities.

 

*Additional disclosure:* As at December 31, 2008, goodwill attributable to the Company’sWireline segment and Wireless segment was $827 million (2007 –$431 million) and $2,737 million (2007 – $2,737 million), respectively.

 

## 17            short-term obligations

##  

OnMarch 3, 2008, TELUS Corporation entered into a new $700 million364-day revolving credit facility with a syndicate of financial institutions,expiring March 2, 2009; on December 15, 2008, the facility wasextended to an expiry date of March 1, 2010. The credit facility isunsecured and bears interest at prime rate or bankers’ acceptance rate (allsuch terms as used or defined in the credit facility), plus applicable margins.The credit facility contains customary representations, warranties andcovenants that are substantively the same as those for TELUS Corporation’slong-term credit facility, as set out in Note 18(d).

 
| ** **                                           | ** ** | **2008**                                    | ** ** | **2007**                                           | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|
| **As at December 31 (millions)** | ** ** | **Bilateral   bank   facilities** | ** ** | **364-day   revolving credit  facility** | ** ** | **Total** | ** ** | **Bilateral  bank   facilities** | ** ** |
| Net available                                        |       | $                                           | 64         |                                               | $          | 700 |   | $ | 764 |   | $ | 74 |   |
| Drawn                                                |       | 11                                          |       | —                                             |       | 11 |   | — |   |
| Outstanding, undrawn letters of credit               |       | 3                                           |       | —                                             |       | 3 |   | 3 |   |
| Gross available                                      |       | $                                           | 78         |                                               | $          | 700 |   | $ | 778 |   | $ | 77 |   |

 

****

 

48

----

##  

notes to consolidated financialstatements

 

## 18            long-term debt

##  

### **(a)**          Details of long-term debt

 

| **As at December 31 ($ in  millions)**                                                                                          | ** ** | ** **                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| **Series**                                                                                                                                | ** ** | **Rate of interest** | ** ** | **Maturity**            | ** ** | **2008**   | ** ** | **2007**   | ** ** |
| TELUS  Corporation Notes                                                                                                                  |       |                           |       |                    | ** ** | ** ** |       |       |       |
| U.S. (2)                                                                                                                                  |       | 8.00                           | %(1)       | June 2011          | ** ** | **$**      | **2,333**  |       | $          | 1,892 |   |
| CB                                                                                                                                        |       | 5.00                           | %(1)       | June 2013          | ** ** | **299**    |       | 298        |       |
| CC                                                                                                                                        |       | 4.50                           | %(1)       | March 2012         | ** ** | **299**    |       | 299        |       |
| CD                                                                                                                                        |       | 4.95                           | %(1)       | March 2017         | ** ** | **688**    |       | 687        |       |
| CE                                                                                                                                        |       | 5.95                           | %(1)       | April 2015         | ** ** | **497**    |       | —     |       |
| ** **                                                                                                                                |       | ** **                     |       | ** **              |       | **4,116**  |       | 3,176      |       |
| TELUS  Corporation Commercial Paper                                                                                                       |       | 2.80                           | %          | Through March 2009 |       | **431**    |       | 585        |       |
| TELUS  Corporation Credit Facility                                                                                                        |       | 2.32                           | %          | May 2012           |       | **978**    |       | —     |       |
| TELUS  Communications Inc. Debentures                                                                                                     |       | ** **                     |       |                    |       | ** ** |       |       |       |
| 1                                                                                                                                         |       | 12.00                          | %(1)       | May 2010           |       | **50**     |       | 50         |       |
| 2                                                                                                                                         |       | 11.90                          | %(1)       | November 2015      |       | **124**    |       | 124        |       |
| 3                                                                                                                                         |       | 10.65                          | %(1)       | June 2021          |       | **173**    |       | 173        |       |
| 5                                                                                                                                         |       | 9.65                           | %(1)       | April 2022         |       | **245**    |       | 245        |       |
| B                                                                                                                                         |       | 8.80                           | %(1)       | September 2025     |       | **198**    |       | 197        |       |
|                                                                                                                                      |       |                           |       |                    |       | **790**    |       | 789        |       |
| TELUS  Communications Inc. First Mortgage Bonds                                                                                           |       |                           |       | ** **              |       |       |       |
| U                                                                                                                                         |       | 11.50                          | %(1)       | July 2010          |       | **30**     |       | 30         |       |
| Capital leases issued at  varying rates of interest from 4.1% to 13.0% and maturing on various       dates up to 2013 |       | **5**                          |       | 6                       |       |
| Other                                                                                                                                     |       |                           |       |                    |       | **2**      |       | 3          |       |
| Long-Term  Debt                                                                                                                           |       |                           |       |                    |       | **6,352**  |       | 4,589      |       |
| Less:  Current maturities                                                                                                                 |       |                           |       |                    |       | **4**      |       | 5          |       |
| Long-Term Debt – non-current                                                                                                         |       |                           |       |                    |       | **$**      | **6,348**  |       | $          | 4,584 |   |
|                                                                                                                                           |            |                                |            |                         |            |            |            |            |            |  |  |  |  |  |  |

 

----

(1)             Interest is payable semi-annually.

(2)             Principal face value of notes is U.S.$1,925million (2007 – U.S.$1,925 million).

 

### **(b)**          TELUS Corporation notes

### ** **

Thenotes are senior, unsecured and unsubordinated obligations of the Company andrank equally in right of payment with all existing and future unsecured,unsubordinated obligations of the Company, are senior in right of payment toall existing and future subordinated indebtedness of the Company, and areeffectively subordinated to all existing and future obligations of, orguaranteed by, the Company’s subsidiaries.

 

Theindentures governing the notes contain certain covenants which, among otherthings, place limitations on the ability of TELUS and certain of itssubsidiaries to: grant security in respect of indebtedness, enter into sale andlease-back transactions and incur new indebtedness.

 

*2011 Cross Currency Interest Rate Swap Agreements:*  Withrespect to the 2011 (U.S. Dollar) Notes, U.S.$1.9 billion (2007 –U.S.$1.9 billion) in aggregate, the Company entered into cross currencyinterest rate swap agreements which effectively convert the principalrepayments and interest obligations to Canadian dollar obligations with aneffective fixed interest rate of 8.493% and an effective fixed economicexchange rate of $1.5327.

 

Thecounterparties of the swap agreements are highly rated financial institutionsand the Company does not anticipate any non-performance. TELUS has not requiredcollateral or other security from the counterparties due to its assessment oftheir creditworthiness.

 

TheCompany translates items such as the U.S. Dollar notes into equivalentCanadian dollars at the rate of exchange in effect at the statement offinancial position date. The swap agreements at December 31, 2008,comprised a net derivative liability of $778 million (2007 –$1,179 million), as set out in Note 5(h). The asset value of the swapagreements increases (decreases) when the statement of financial position dateexchange rate increases (decreases) the Canadian dollar equivalent of theU.S. Dollar notes.

 

****

 

49

----

 

notes to consolidated financialstatements

 
| ** **                         | ** ** | ** **      | ** ** | ** **           | ** ** | **Principal face amount** | ** ** | **Redemption   present value** | ** ** |
|------------------------------------|------------|-----------------|------------|----------------------|------------|-------------------------------------|------------|------------------------------------------|------------|
| **Series**                         | ** ** | **Issued**      | ** ** | **Issue price** | ** ** | **Originally   issued**        | ** ** | **Outstanding**                          | ** ** | **spread  (basis points)****(1)** | ** ** |
| 8.00% (U.S. Dollar) Notes due 2011 |       | May 2001   |       | U.S.$994.78          |       | U.S.$2.0 billion                    |       | U.S.$1.9 billion                    |       | 30 |   |
| 5.00% Notes, Series CB        |       | May 2006   |       | $998.80              |       | $300 million                        |       | $300 million                             |       | 16 |   |
| 4.50% Notes, Series CC        |       | March 2007 |       | $999.91              |       | $300 million                        |       | $300 million                             |       | 15 |   |
| 4.95% Notes, Series CD        |       | March 2007 |       | $999.53              |       | $700 million                        |       | $700 million                             |       | 24 |   |
| 5.95% Notes, Series CE(2)     |       | April 2008 |       | $998.97              |       | $500 million                        |       | $500 million                             |       | 66 |   |

 

----

(1)             The notes are redeemable at the option of theCompany, in whole at any time, or in part from time to time, on not fewer than30 and not more than 60 days’ prior notice. The redemption price is equal tothe greater of (i) the present value of the notes discounted at theAdjusted Treasury Rate (in respect of the U.S. Dollar denominated notes) or theGovernment of Canada yield (in respect of the Canadian dollar denominatednotes) plus the redemption present value spread, or (ii) 100% of theprincipal amount thereof. In addition, accrued and unpaid interest, if any,will be paid to the date fixed for redemption.

(2)             The Series CE Notes require theCompany to make an offer to repurchase the Series CE Notes at a priceequal to 101% of their principal plus accrued and unpaid interest to the dateof repurchase upon the occurrence of a change in control triggering event, asdefined in the supplemental trust indenture.

 

### **(c)**          TELUS Corporation commercial paper

### ** **

On May 15, 2007, TELUS Corporation enteredinto an unsecured commercial paper program, which is backstopped by a portionof its $2.0 billion syndicated credit facility, enabling it to issuecommercial paper up to a maximum aggregate of $800 million (or U.S. Dollarequivalent), to be used for general corporate purposes, including capitalexpenditures and investments; in August 2008, the program was expanded to$1.2 billion. Commercial paper debt is due within one year but isclassified as long-term debt as the amounts are fully supported, and theCompany expects that they will continue to be supported, by the revolvingcredit facility which has no repayment requirements within the next year.

 

### **(d)**          TELUS Corporation credit facility

### ** **

OnMarch 2, 2007, TELUS Corporation entered into a $2.0 billionbank credit facility with a syndicate of financial institutions. The creditfacility consists of a $2.0 billion (or U.S. Dollar equivalent) revolvingcredit facility expiring on May 1, 2012, to be used for general corporatepurposes including the backstop of commercial paper.

 

TELUS Corporation’scredit facility is unsecured and bears interest at prime rate, U.S. DollarBase Rate, a bankers’ acceptance rate or London interbank offered rate (LIBOR)(all such terms as used or defined in the credit facility), plus applicablemargins. The credit facility contains customary representations, warranties andcovenants including two financial quarter-end financial ratio tests. Thefinancial ratio tests are that the Company may not permit its net debt tooperating cash flow ratio to exceed 4.0:1 and may not permit its operating cashflow to interest expense ratio to be less than 2.0:1, each as defined under thecredit facility.

 

Continuedaccess to TELUS Corporation’s credit facility is not contingent on themaintenance by TELUS Corporation of a specific credit rating.

 
| **As at December 31 ****(millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Revolving credit facility expiring  May 1, 2012     |       |     |       |     |       |
| Net available                                            | ** ** | **$**    | **387**    |     | $          | 1,309 |   |
| Drawn(1)                                                 | ** ** | **980**  |       | —   |       |
| Outstanding, undrawn letters of credit                   | ** ** | **201**  |       | 104      |       |
| Backstop of commercial paper                             | ** ** | **432**  |       | 587      |       |
| Gross available                                          | ** ** | **$**    | **2,000**  |     | $          | 2,000 |   |

 

----

(1)             Amounts drawn include bankers’ acceptances of$930 (2007 – $NIL).

 

### **(e)**          TELUS Communications Inc. debentures

### ** **

Theoutstanding Series 1 through 5 debentures were issued by a predecessorcorporation of TELUS Communications Inc., BC TEL, under a TrustIndenture dated May 31, 1990, and are non-redeemable.

 

Theoutstanding Series B Debentures were issued by a predecessor corporationof TELUS Communications Inc., AGT Limited, under a TrustIndenture dated August 24, 1994, and a supplemental trust indenture dated September 22,1995. They are redeemable at the option of the Company, in whole at any time orin part from time to time, on not less than 30 days’ notice at the higher ofpar and the price calculated to provide the Government of Canada Yield plus 15basis points.

 

Pursuantto an amalgamation on January 1, 2001, the Debentures became obligationsof TELUS Communications Inc. The debentures are not secured by anymortgage, pledge or other charge and are governed 

 

****

 

50

----

 

notes to consolidated financialstatements

 

by certain covenants including a negativepledge and a limitation on issues of additional debt, subject to a debt tocapitalization ratio and interest coverage test.

 

### **(f)**            TELUSCommunications Inc. first mortgage bonds

### ** **

Thefirst mortgage bonds were issued by TELUS Communications (Québec) Inc. and aresecured by an immovable hypothec and by a movable hypothec chargingspecifically certain immovable and movable property of the subsidiary TELUSCommunications Inc., such as land, buildings, equipment, apparatus, telephonelines, rights-of-way and similar rights limited to certain assets located inthe province of Quebec. The first mortgage bonds are non-redeemable. Pursuantto a corporate reorganization effected July 1, 2004, the outstanding firstmortgage bonds became obligations of TELUS Communications Inc.

 

### **(g)**         Long-term debt maturities

### ** **

Anticipatedrequirements to meet long-term debt repayments, including related hedge amountsand calculated upon such long-term debts owing as at December 31, 2008,for each of the next five fiscal years are as follows:

 
| ** **                                                                         | ** ** | **Canadian Dollars** | ** ** | **U.S. Dollars** | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|-----------------|------------|
| **Debt denominated in**                                                  | ** ** | **Other**                 | ** ** | **Capital**           | ** ** | ** **      | ** ** | **Derivative liability** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Years ending December 31 (millions)**                        | ** ** | **debt**                  | ** ** | **leases**            | ** ** | **Debt****(1)** | ** ** | **(Receive)****(1)** | ** ** | **Pay** | ** ** | **Total** | ** ** | **Total** | ** ** |
| 2009                                                                               |       | $                         | 1          |                  | $          | 3               |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 4 |   |
| 2010                                                                               |       | 80                        |       | 2                     |       | —          |       | — |   | — |   | — |   | 82 |   |
| 2011                                                                               |       | —                    |       | —                |       | 2,345           |       | (2,345 | ) | 2,950 |   | 2,950 |   | 2,950 |   |
| 2012                                                                               |       | 1,712                     |       | —                |       | —          |       | — |   | — |   | — |   | 1,712 |   |
| 2013                                                                               |       | 300                       |       | —                |       | —          |       | — |   | — |   | — |   | 300 |   |
| Thereafter                                                                         |       | 1,949                     |       | —                |       | —          |       | — |   | — |   | — |   | 1,949 |   |
| Future cash outflows in respect of debt  principal repayments                      |       | 4,042                     |       | 5                     |       | 2,345           |       | (2,345 | ) | 2,950 |   | 2,950 |   | 6,997 |   |
| Future cash outflows in respect of  associated interest and like carrying costs(2) |       | 1,700                     |       | 1                     |       | 468             |       | (468 | ) | 627 |   | 627 |   | 2,328 |   |
| Undiscounted  contractual maturities (Note 5(c))                              |       | $                         | 5,742      |                  | $          | 6               |       | $ | 2,813 |   | $ | (2,813 | ) | $ | 3,577 |   | $ | 3,577 |   | $ | 9,325 |   |

 

----

(1)             Where applicable, principal-related cashflows reflect foreign exchange rates at December 31, 2008.

(2)             Future cash outflows in respect of associatedinterest and like carrying costs for commercial paper and amounts drawn underthe Company’s credit facility have been calculated based upon the rates ineffect as at December 31, 2008.

 

## 19            shareholders’ equity

##  

### **(a)**          Details of shareholders’ equity

 
| **As at December 31****($in millions)**   | ** **    | **2008**   | ** ** | **2007**   |   |
|---------------------------------------------------------------|---------------|------------|------------|------------|--------|
| **Preferred equity**                                          | ** **    | ** ** | ** ** | ** ** |   |
| Authorized                                                    | Amount        |       | ** ** | ** ** |   |   |   |
| First Preferred Shares                                        | 1,000,000,000 |       | ** ** | ** ** |   |   |   |
| Second Preferred Shares                                       | 1,000,000,000 |       | ** ** | ** ** |   |   |   |
| **Common equity**                                             |          |       | ** ** | ** ** |   |   |   |
| Share capital                                                 |          |       | ** ** | ** ** |   |   |   |
| Shares                                                        |          |       | ** ** | ** ** |   |   |   |
| Authorized                                                    | Amount        |       | ** ** | ** ** |   |   |   |
| Common Shares                                                 | 1,000,000,000 |       | ** ** | ** ** |   |   |   |
| Non-Voting Shares                                             | 1,000,000,000 |       | ** ** | ** ** |   |   |   |
| Issued                                                        |          |       | ** ** | ** ** |   |   |   |
| Common Shares (b)                                             | ** **    | **$**      | **2,216**  |       | $      | 2,228 |   |
| Non-Voting Shares (b)                                         | ** **    | **3,069**  |       | 3,192      |   |
| ** **                                                    |          | **5,285**  |       | 5,420      |   |
| Retained earnings and accumulated other  comprehensive income |          |       |       |       |   |
| Retained earnings                                             | ** **    | **1,859**  |       | 1,458      |   |
| Accumulated other comprehensive income  (loss) (c)            | ** **    | **(130**   | **)**      | (104       | )      |
| Total                                                         | ** **    | **1,729**  |       | 1,354      |   |
| Contributed surplus (d)                                       | ** **    | **168**    |       | 152        |   |
| Total Shareholders’ Equity                               | ** **    | **$**      | **7,182**  |       | $      | 6,926 |   |

 

****

 

51

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

### **(b)**          Changes in Common Shares and Non-VotingShares

 
| ** **                                                                                             | ** ** | **2008**                   | ** ** | **2007**               | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| **Years ended December 31 ($ in millions)**                              | ** ** | **Number of  shares** | ** ** | **Share capital** | ** ** | **Number of  shares** | ** ** | **Share capital** | ** ** |
| **Common Shares**                                                                                      |       |                       |       |                   |       |   |   |   |   |
| Beginning of period                                                                                    | ** ** | **175,766,114**            | ** ** | **$**                  | **2,228**  | ** ** | 178,667,834 |   | $ | 2,265 |   |
| Common Shares issued pursuant to exercise  of share options (e)                                   | ** ** | **1,700**                  | ** ** | **—**             | ** ** | 3,180 |   | — |   |
| Purchase of shares for cancellation  pursuant to normal course issuer bid (f)                | ** ** | **(950,300**               | **)**      | **(12**                | **)**      | (2,904,900 | ) | (37 | ) |
| End of period                                                                                          | ** ** | **174,817,514**            | ** ** | **$**                  | **2,216**  | ** ** | 175,766,114 |   | $ | 2,228 |   |
| **Non-Voting Shares**                                                                                  |       |                       |       |                   | ** ** |   |   |   |   |
| Beginning of period                                                                                    | ** ** | **148,581,171**            | ** ** | **$**                  | **3,192**  | ** ** | 159,240,734 |   | $ | 3,421 |   |
| Non-Voting Shares issued pursuant to  exercise of share options (e)                               | ** ** | **13,339**                 | ** ** | **—**             | ** ** | 29,790 |   | 1 |   |
| Non-Voting Shares issued pursuant to use of  share option award net-equity settlement feature (e) | ** ** | **47,748**                 | ** ** | **2**                  | ** ** | 16,647 |   | — |   |
| Purchase of shares for cancellation  pursuant to normal course issuer bid (f)                | ** ** | **(5,810,400**             | **)**      | **(125**               | **)**      | (10,706,000 | ) | (230 | ) |
| End of period                                                                                          | ** ** | **142,831,858**            | ** ** | **$**                  | **3,069**  | ** ** | 148,581,171 |   | $ | 3,192 |   |

 

Theamounts credited to the Common Share and Non-Voting Share capital accounts uponexercise of share options in the preceding table are all for cash received fromexercise.

 

### **(c)**          Accumulated other comprehensive income(loss)

** **
| ** **                                                                                                       | ** ** | **2008**                                         | ** ** | **2007**                                                      | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **Other comprehensive  income (loss)** | ** ** | **Accumulated  Other comprehensive  income (loss)** | ** ** | **other comprehensive  income (loss)** | ** ** | **Accumulated  other comprehensive  income (loss)** | ** ** |
| **Years ended December 31  (millions)**                                                           | ** ** | **Amount  arising**                              | ** ** | **Income  taxes**                                             | ** ** | **Net** | ** ** | **Beginning  of period** | ** ** | **End of  period** | ** ** | **Amount  arising** | ** ** | **Income  taxes** | ** ** | **Net** | ** ** | **Beginning  of period****(1)** | ** ** | **End of  period** | ** ** |
| **Change  in unrealized fair value of derivatives designated as cash flow hedges (Note  5(i))**                  |       |                                             |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gains (losses)  arising in current period                                                                        | ** ** | **$**                                            | **405**    | ** **                                                    | **$**      | **58** | ** ** | **$** | **347** | ** ** |   |   |   |   | $ | (354 | ) | $ | (40 | ) | $ | (314 | )  |   |   |   |   |
| (Gains) losses  arising in prior periods and transferred to net income in the current period                     | ** ** | **(440**                                         | **)**      | **(67**                                                       | **)**      | **(373** | **)** |   |   |   | ** ** | 477 |   | 81 |   | 396 |   |   |   |   |   |
| ** **                                                                                                       | ** ** | **(35**                                          | **)**      | **(9**                                                        | **)**      | **(26** | **)** | **$** | **(96** | **)** | **$** | **(122** | **)** | 123 |   | 41 |   | 82 |   | $ | (178 | ) | $ | (96 | ) |
| **Cumulative  foreign currency translation adjustment**                                                          | ** ** | **2**                                            | ** ** | **—**                                                    | ** ** | **2** | ** ** | **(9** | **)** | **(7** | **)** | (7 | ) | — |   | (7 | ) | (2 | ) | (9 | ) |
| **Change  in unrealized fair value of available-for-sale financial assets and recognition  of amounts realized** | ** ** | **(2**                                           | **)**      | **—**                                                    | ** ** | **(2** | **)** | **1** | ** ** | **(1** | **)** | (1 | ) | — |   | (1 | ) | 2 |   | 1 |   |
| ** **                                                                                                       | ** ** | **$**                                            | **(35**    | **)**                                                         | **$**      | **(9** | **)** | **$** | **(26** | **)** | **$** | **(104** | **)** | **$** | **(130** | **)** | $ | 115 |   | $ | 41 |   | $ | 74 |   | $ | (178 | ) | $ | (104 | ) |

 

----

(1)             Beginning of periodamounts are the transitional amounts arising from adoption of new accountingstandard and arise primarily from cross currency interest rate swaps (Note18(b)) and are net of income taxes of $82.

 

Thenet amount of the existing gains (losses) arising from the unrealized fairvalue of the 2011 cross currency interest rate swap agreements, which arederivatives that are designated as cash flow hedges and are reported inaccumulated other comprehensive income, would be reclassified to net income ifthe agreements (see Note 18(b)) were early terminated; the amount of suchreclassification would be dependent upon fair values and amounts of theagreements terminated. As at December 31, 2008, the Company’s estimate ofthe net amount of existing gains (losses) arising from the unrealized fairvalue of derivatives designated as cash flow hedges, other than in respect ofthe 2011 cross currency interest rate swap 

 

****

 

52

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

agreements,which are reported in accumulated other comprehensive income and are expectedto be reclassified to net income in the next twelve months, excluding taxeffects, is $4 million.

 

### **(d)**          Contributed surplus

 
| **Years ended December 31 (millions)**                                                                                                                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Balance, beginning of period                                                                                                                               |       | **$**      | **152**    |       | $          | 163 |   |
| Share option award expense                                                                                                                                                |       |       |       |       |       |
| - Recognized in period(1)                                                                                                                                                 | ** ** | **18**     | ** ** | 15         |       |
| - Reclassified to Non-Voting Share capital  account upon use of share option award net-equity settlement feature                                                          | ** ** | **(2**     | **)**      | —     |       |
| - Reclassified from current liabilities as  awards exercised and eligible for net-cash settlement were settled other than  through the use of net-cash settlement feature | ** ** | **—** | ** ** | (26        | )          |
| Balance, end of period                                                                                                                                                    | ** ** | **$**      | **168**    | ** ** | $          | 152 |   |

 

----

(1)             This amount represents the expense for shareoption awards accounted for as equity instruments; the difference between thisamount and the amount disclosed in Note 12(a), if any, is the expense for shareoption awards accounted for as liability instruments.

 

### **(e)**          Share option plans

 

TheCompany has a number of share option plans under which officers and other employeesmay receive options to purchase Non-Voting Shares at a price equal to the fairmarket value at the time of grant; prior to 2001, options were also similarlyawarded in respect of Common Shares. Prior to 2002, directors were also awardedoptions to purchase Non-Voting Shares and Common Shares at a price equal to thefair market value at the time of grant. Option awards currently granted underthe plans may be exercised over specific periods not to exceed seven years fromthe time of grant; prior to 2003, share option awards were granted withexercise periods not to exceed ten years.

 

Thefollowing table presents a summary of the activity related to the Company’sshare option plans.

 
| ** **                                | ** ** | **2008**                           | ** ** | **2007**                                            | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------|------------|
| **Year ended December 31** | ** ** | **Number of  share  options** | ** ** | **Weighted  average share  option price** | ** ** | **Number   share  options** | ** ** | **Weighted  average share  option price** | ** ** |
| Outstanding, beginning of period          | ** ** | **8,284,634**                      | ** ** | **$**                                               | **37.17**  |   | 10,569,462 |   | $ | 31.46 |   |
| Granted                                   | ** ** | **2,949,957**                      | ** ** | **43.81**                                           |       | 1,347,893 |   | 56.59 |   |
| Exercised(1)                              | ** ** | **(582,286**                       | **)**      | **27.54**                                           |       | (3,041,122 | ) | 26.60 |   |
| Forfeited                                 | ** ** | **(466,489**                       | **)**      | **45.61**                                           |       | (591,599 | ) | 33.74 |   |
| Expired                                   | ** ** | **(32,500**                        | **)**      | **46.72**                                           |       | — |   | — |   |
| Outstanding, end of period                | ** ** | **10,153,316**                     | ** ** | **$**                                               | **39.23**  |   | 8,284,634 |   | $ | 37.17 |   |

 

----

(1)             The total intrinsic value of share option awards exercised was $9 million(2007 — $94 million) (reflecting a weighted average price at the dates ofexercise of $42.54 per share (2007 — $57.44 per share)). The tax benefitrealized for the tax deductions from share option exercises was $2 million(2007 — $36 million).

 

In2006, certain outstanding grants of share option awards, which were made after2001, had a net-equity settlement feature applied to them. This event did notresult in the optionees receiving incremental value and therefore modificationaccounting was not required for it. The optionee does not have the choice ofexercising the net-equity settlement feature. It is at the Company’s discretionwhether an exercise of the share option award is settled as a share option orusing the net-equity settlement feature. In 2007, certain outstanding grants ofshare option awards had a net-cash settlement feature applied to them, asfurther discussed in Note 12(b); the optionee has the choice of exercisingthe net-cash settlement feature.

 

****

 

53

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

Thefollowing table reconciles the number of share options exercised and theassociated number of Common Shares and Non-Voting Shares issued.

 
| ** **                                                                                             | ** ** | **2008**           | ** ** | **2007**               | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Years ended December 31**                                                             | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total** | ** ** |
| Shares issued pursuant to exercise of share  options                                                   | ** ** | **1,700**          | ** ** | **13,339**             | ** ** | **15,039** |   | 3,180 |   | 29,790 |   | 32,970 |   |
| Impact of optionee choosing to settle share  option award exercises using net-cash settlement feature  | ** ** | **34,667**         | ** ** | **341,421**            | ** ** | **376,088** |   | 339,002 |   | 2,643,953 |   | 2,982,955 |   |
| Shares issued pursuant to use of share  option award net-equity settlement feature                     | ** ** | **N/A**            | **(1)**    | **47,748**             | ** ** | **47,748** |   | N/A | (1) | 16,647 |   | 16,647 |   |
| Impact of Company choosing to settle share  option award exercises using net-equity settlement feature | ** ** | **N/A**            | **(1)**    | **143,411**            | ** ** | **143,411** |   | N/A | (1) | 8,550 |   | 8,550 |   |
| Share options exercised                                                                                | ** ** | **36,367**         | ** ** | **545,919**            | ** ** | **582,286** |   | 342,182 |   | 2,698,940 |   | 3,041,122 |   |

 

----

(1)             Share option awards for Common Shares do nothave a net-equity settlement feature.

 

The following is a life and exercise price stratificationof the Company’s share options outstanding as at December 31, 2008.

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Options exercisable** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number  of**               | ** ** | **Weighted  average** | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total**  | ** ** | **shares**                   | ** ** | **price** | ** ** |
| **Options outstanding****(1)**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Range of option prices                               |       |       |       |       |       |       |       |       |       |       |       |       |       |                         |       |   |   |   |   |   |   |   |   |
| Low                                                  |       | $          | 8.43       |       | $          | 14.63      |       | $          | 21.99      |       | $          | 33.14      |       | $                            | 50.47      |   | $ | 8.43 |   |   |   | ** ** | ** ** |
| High                                                 |       | $          | 10.75      |       | $          | 19.92      |       | $          | 32.83      |       | $          | 47.22      |       | $                            | 64.64      |   | $ | 64.64 |   |   |   | ** ** | ** ** |
| Year of expiry and number of shares                  |       |       |       |       |       |       |       |       |       |       |       |       |       |                         |       | ** ** | ** ** |
| 2009                                                 |       | 2,944      |       | 285,802    |       | 93,642     |       | 62,315     |       | —     |       | 444,703    |       | 444,703                      |       | $ | 21.85 | ** ** |
| 2010                                                 |       | —     |       | 58,071     |       | 536,377    |       | 254,217    |       | —     |       | 848,665    |       | 848,665                      |       | $ | 27.93 | ** ** |
| 2011                                                 |       | —     |       | 3,500      |       | 1,035,413  |       | 790,984    |       | —     |       | 1,829,897  |       | 1,829,897                    |       | $ | 28.98 | ** ** |
| 2012                                                 |       | 7,083      |       | 126,300    |       | 65,000     |       | 1,438,019  |       | —     |       | 1,636,402  |       | 1,045,827                    |       | $ | 33.07 | ** ** |
| 2013                                                 |       | —     |       | —     |       | —     |       | 1,335,571  |       | 53,032     |       | 1,388,603  |       | —                       |       | $ | — | ** ** |
| 2014                                                 |       | —     |       | —     |       | —     |       | 12,495     |       | 1,201,632  |       | 1,214,127  |       | —                       |       | $ | — | ** ** |
| 2015                                                 |       | —     |       | —     |       | —     |       | 2,790,919  |       | —     |       | 2,790,919  |       | —                       |       | $ | — | ** ** |
|                                                 |       | 10,027     |       | 473,673    |       | 1,730,432  |       | 6,684,520  |       | 1,254,664  |       | 10,153,316 |       | 4,169,092                    |       | ** ** | ** ** |
| Weighted average remaining contractual life  (years) |       | 2.7        |       | 1.8        |       | 2.3        |       | 4.5        |       | 5.2        |       | 4.1        |       |                         |       | ** ** | ** ** |
| Weighted average price                               |       | $          | 10.14      |       | $          | 16.05      |       | $          | 24.71      |       | $          | 41.41      |       | $                            | 56.66      |   | $ | 39.23 |   |   |   | ** ** | ** ** |
| Aggregate intrinsic  value(2) (millions)        |       | $          | —     |       | $          | 9          |       | $          | 18         |       | $          | —     |       | $                            | —     |   | $ | 27 |   |   |   | ** ** | ** ** |
| **Options exercisable**                              |       |       |       |       |       |       |       |       |       |       |       |       |       |                         |       | ** ** | ** ** |
| Number of shares                                     |       | 10,027     |       | 473,673    |       | 1,730,432  |       | 1,954,960  |       | —     |       | 4,169,092  |       |                         |       | ** ** | ** ** |
| Weighted average remaining contractual life  (years) |       | 2.7        |       | 1.8        |       | 2.3        |       | 2.5        |       | —     |       | 2.3        |       |                         |       | ** ** | ** ** |
| Weighted average price                               |       | $          | 10.14      |       | $          | 16.05      |       | $          | 24.71      |       | $          | 36.09      |       | $                            | —     |   | $ | 29.03 |   |   |   | ** ** | ** ** |
| Aggregate intrinsic  value(2) (millions)        |       | $          | —     |       | $          | 9          |       | $          | 18         |       | $          | —     |       | $                            | —     |   | $ | 27 |   |   |   | ** ** | ** ** |

 

----

(1)             As at December 31, 2008, 9,603,650 shareoptions, with a weighted average remaining contractual life of 4.0 years,a weighted average price of $38.95 and an aggregate intrinsic value of$27 million, are vested or were expected to vest; these amounts differfrom the corresponding amounts for all share options outstanding due to anestimate for expected forfeitures.

(2)             The aggregate intrinsic value is calculatedupon December 31, 2008, per share prices of $37.17 for Common Sharesand $34.90 for Non-Voting Shares.

 

Asat December 31, 2008, less than one million Common Shares andapproximately 15 million Non-Voting Shares were reserved for issuance,from Treasury, under the share option plans.

 

### **(f)**            Purchase ofshares for cancellation pursuant to normal course issuer bid

### ** **

Asreferred to in Note 3, the Company may purchase shares for cancellationpursuant to normal course issuer bids in order to maintain or adjust itscapital structure. The Company has purchased, for cancellation, through thefacilities of the Toronto Stock Exchange or other means permitted by theToronto Stock Exchange and other securities regulators, including privatelynegotiated block purchases, Common Shares and Non-Voting Shares pursuant to successivenormal course issuer bids; the Company’s most current normal course issuer bidruns for a twelve-month period ending December 22, 2009, for up to4 million Common Shares and 4 million Non-Voting Shares. The excessof the purchase 

 

****

 

54

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

priceover the average stated value of shares purchased for cancellation was chargedto retained earnings. The Company ceases to consider shares outstanding on thedate of the Company’s purchase of its shares although the actual cancellationof the shares by the transfer agent and registrar occurs on a timely basis on adate shortly thereafter.

 
| ** **                                                                | ** ** | ** **                 | ** ** | **Purchase price** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| **Years ended December 31 ($ in millions)** | ** ** | **Number of  shares** | ** ** | **Paid**                | ** ** | **Charged to  share capital** | ** ** | **Charged to  retained  earnings** | ** ** |
| **Common Shares purchased for cancellation**                              |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 10,259,011                 |       | $                       | 440        |   | $ | 129 |   | $ | 311 |   |
| Program commencing December 20, 2005                                 |       | 6,125,069                  |       | 290                     |       | 77 |   | 213 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | —                     |       | —                  |       | — |   | — |   |
| During fiscal 2007 year                                                   |       | 2,904,900                  |       | 167                     |       | 37 |   | 130 |   |
| Program total                                                             |       | 2,904,900                  |       | 167                     |       | 37 |   | 130 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | —                     |       | —                  |       | — |   | — |   |
| During fiscal 2008 year                                                   |       | 950,300                    |       | 39                      |       | 12 |   | 27 |   |
| Program total                                                             |       | 950,300                    |       | 39                      |       | 12 |   | 27 |   |
| All programs — inception to date                                     |       | 20,239,280                 |       | $                       | 936        |   | $ | 255 |   | $ | 681 |   |
| All programs — during fiscal 2008 year                               | ** ** | **950,300**                | ** ** | **$**                   | **39**     | ** ** | **$** | **12** | ** ** | **$** | **27** | ** ** |
| All programs — during fiscal 2007 year                               |       | 2,904,900                  |       | $                       | 167        |   | $ | 37 |   | $ | 130 |   |
| **Non-Voting Shares purchased for  cancellation**                         |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 11,500,000                 |       | $                       | 473        |   | $ | 241 |   | $ | 232 |   |
| Program commencing December 20, 2005                                 |       | 11,309,100                 |       | 557                     |       | 241 |   | 316 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | 186,723                    |       | 10                      |       | 4 |   | 6 |   |
| During fiscal 2007 year                                                   |       | 10,571,800                 |       | 577                     |       | 227 |   | 350 |   |
| Program total                                                             |       | 10,758,523                 |       | 587                     |       | 231 |   | 356 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | 134,200                    |       | 6                       |       | 3 |   | 3 |   |
| During fiscal 2008 year                                                   |       | 5,810,400                  |       | 241                     |       | 125 |   | 116 |   |
| Program total                                                             |       | 5,944,600                  |       | 247                     |       | 128 |   | 119 |   |
| All programs — inception to date                                     |       | 39,512,223                 |       | $                       | 1,864      |   | $ | 841 |   | $ | 1,023 |   |
| All programs — during fiscal 2008 year                               | ** ** | **5,810,400**              | ** ** | **$**                   | **241**    | ** ** | **$** | **125** | ** ** | **$** | **116** | ** ** |
| All programs — during fiscal 2007 year                               |       | 10,706,000                 |       | $                       | 583        |   | $ | 230 |   | $ | 353 |   |
| **Common Shares and Non-Voting Shares  purchased for cancellation**       |       |                       |       |                    |       |   |   |   |   |
| Program commencing December 20, 2004                                 |       | 21,759,011                 |       | $                       | 913        |   | $ | 370 |   | $ | 543 |   |
| Program commencing December 20, 2005                                 |       | 17,434,169                 |       | 847                     |       | 318 |   | 529 |   |
| Program commencing December 20, 2006                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2006 year                                                   |       | 186,723                    |       | 10                      |       | 4 |   | 6 |   |
| During fiscal 2007 year                                                   |       | 13,476,700                 |       | 744                     |       | 264 |   | 480 |   |
| Program total                                                             |       | 13,663,423                 |       | 754                     |       | 268 |   | 486 |   |
| Program commencing December 20, 2007                                 |       |                       |       |                    |       |   |   |   |   |
| During fiscal 2007 year                                                   |       | 134,200                    |       | 6                       |       | 3 |   | 3 |   |
| During fiscal 2008 year                                                   |       | 6,760,700                  |       | 280                     |       | 137 |   | 143 |   |
| Program total                                                             |       | 6,894,900                  |       | 286                     |       | 140 |   | 146 |   |
| All programs — inception to date                                     |       | 59,751,503                 |       | $                       | 2,800      |   | $ | 1,096 |   | $ | 1,704 |   |
| All programs — during fiscal 2008 year                               | ** ** | **6,760,700**              | ** ** | **$**                   | **280**    | ** ** | **$** | **137** | ** ** | **$** | **143** | ** ** |
| All programs — during fiscal 2007 year                               |       | 13,610,900                 |       | $                       | 750        |   | $ | 267 |   | $ | 483 |   |

 

****

 

55

----

### ** **

| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

### **(g)**         Dividend Reinvestment and Share PurchasePlan

 

TheCompany has a Dividend Reinvestment and Share Purchase Plan under whicheligible shareholders may acquire Non-Voting Shares through the reinvestment ofdividends and making additional optional cash payments to the trustee.

 

ExcludingNon-Voting Shares purchased by way of additional optional cash payments, theCompany, at its discretion, may offer the Non-Voting Shares at up to a 5%discount from the market price. Effective January 1, 2005, the Company didnot offer Non-Voting Shares at a discount. Shares purchased through optionalcash payments are subject to a minimum investment of $100 per transaction and amaximum investment of $20,000 per calendar year.

 

Underthis Plan, the Company has the option of offering shares from Treasury orhaving the trustee acquire shares in the stock market. Prior to July 1,2001, when the acquisition of shares from Treasury commenced, all Non-VotingShares were acquired in the market at normal trading prices; acquisition in themarket at normal trading prices recommenced on January 1, 2005.

 

Inrespect of Common Share and Non-Voting Share dividends declared during the yearended December 31, 2008, $21 million (2007 — $17 million) was tobe reinvested in Non-Voting Shares.

 

## 20            commitments and contingent liabilities

##  

### **(a)**          Canadian Radio-television andTelecommunications Commission Decisions 2002-34, 2002-43 and 2006-9 deferral accounts

### ** **

Asfurther discussed in Note 4, on May 30, 2002, and on July 31, 2002,the CRTC issued Decisions 2002-34 and 2002-43, respectively, andintroduced the concept of a deferral account as a component of the price capsform of regulation. The Company must make significant estimates and assumptionsin respect of the deferral accounts given the complexity and interpretationrequired of Decisions 2002-34 and 2002-43. Accordingly, the Companyestimates, and records, an aggregate liability of $146 million as at December 31,2008 (2007 — $147 million), to the extent that activities it hasundertaken, other qualifying events and realized rate reductions for CompetitorServices do not extinguish it; management is required to make estimates andassumptions in respect of the offsetting nature of these items. If the CRTC,upon its periodic review of the Company’s deferral account, disagrees withmanagement’s estimates and assumptions, the CRTC may adjust the deferralaccount balance and such adjustment may be material. Ultimately, this processresults in the CRTC determining if, and when, the deferral account liability issettled.

 

OnMarch 24, 2004, the CRTC issued Telecom Public Notice CRTC 2004-1, *Review and disposition of the deferral accounts for the second pricecap period*, which initiated a public proceeding inviting proposalson the disposition of the amounts accumulated in the incumbent local exchangecarriers’ deferral accounts. Although amounts were accumulated in the deferralaccount only during the four-year period ended May 31, 2006, theproceeding was to address only the amounts accumulated in the deferral accountduring the two-year period ended May 31, 2004. The outcomes of thisproceeding are as set out in the following table.

 

****

 

56

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 
| **Initiative**                                                                                                                                                                                           | ** ** | **Expansion of broadband  services in respective  incumbent local exchange  carrier operating territories  to rural and remote** | ** ** | **Enhance accessibility to  telecommunications  services for individuals with**                                                                                                     | ** ** | **Rebate balance of deferral  account to local residential  customers in non-high cost** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|
| **Decision**                                                                                                                                                                                             | ** ** | **Issued**                                                                                                                                                                              | ** ** | **communities**                                                                                                                                                                                              | ** ** | **disabilities**                                                                                                                      | ** ** | **serving areas** |
| Decision  CRTC 2006-9, *Disposition of funds in the deferral  account*                                                                                                                                   |       | February 16, 2006                                                                                                                                                                  |       | Majority  of accumulated balance of deferral account to be used for this initiative                                                                                                                          |       | Minimum  of 5% of accumulated balance of deferral account to be used for this  initiative                                             |   | Remaining  amount of accumulated balance of deferral account to be used for this  initiative |
| Decision  CRTC 2007-50, *Use of deferral account to expand  broadband services to certain rural and remote communities*                                                                                  |       | July 6, 2007                                                                                                                                                                       |       | Expansion  of broadband services to 115 communities in British Columbia and Quebec  approved                                                                                                                 |       |                                                                                                                                  |   |   |
| Decision  CRTC 2008-1, *Use of deferral account funds to improve  access to telecommunications services for persons with disabilities and to  expand broadband services to rural and remote communities* |       | January 17, 2008                                                                                                                                                                   |       | Expansion  of broadband services to an additional 119 rural and remote communities  approved; determination that no further communities can be submitted to  exhaust remaining funds in the deferral account |       | Approved  the use of approximately 5% of the accumulated balance of the Company’s  deferral account                              |   | Confirmed  that remaining amount of accumulated balance of deferral account to be used  for this initiative |

 

Therehave been a series of escalating court actions since the issuance of CRTCTelecom Decision 2006-9 and Telecom Decision 2008-1 and the litigantshave included the Consumers Association of Canada, the National Anti-PovertyOrganization, Bell Canada and the Company. The consumer groups have appealed tothe courts to direct that rebates be made to local telephone subscribers ratherthan have the accumulated deferral account funds used for purposes determinedby the CRTC, as noted above. Bell Canada has appealed to the courts that theCRTC has exceeded its jurisdiction to the extent it approved rebates from thedeferral account. The Company has appealed to the courts to permit incumbentlocal exchange carriers to file for approval further lists of communities thatwould be eligible for broadband expansion from the remaining funds in thedeferral account rather than rebating the remaining funds to local telephonesubscribers. The Supreme Court of Canada has granted a stay of CRTC TelecomDecision 2006-9 in so far as it requires a rebate to local telephonesubscribers. The appeals pertaining to the disposition of the accumulatedamounts in the deferral account by the consumer groups, Bell Canada and theCompany are currently scheduled to be heard by the Supreme Court of Canada in March 2009.The Company anticipates a decision on this matter in the latter half of 2009.

 

Dueto the Company’s use of the liability method of accounting for the deferralaccount, the CRTC Decision 2005-6, as it relates to the Company’sprovision of Competitor Digital Network services, is not expected to affect theCompany’s consolidated revenues. Specifically, to the extent that the CRTCDecision 2005-6 requires the Company to provide discounts on CompetitorDigital Network services, through May 31, 2006, the Company drew down thedeferral account by an offsetting amount; subsequent to May 31, 2006, thestatement of income and other comprehensive income effects did not change andthe Company no longer needed to account for these amounts through the deferralaccount. For the year ended December 31, 2008, the Company drew down thedeferral account by $1 million (2007 — $18 million) in respectof discounts on Competitor Digital Network services and other qualifyingexpenditures.

 

****

 

57

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

### **(b)**          Leases

### ** **

TheCompany occupies leased premises in various centres and has land, buildings andequipment under operating leases. At December 31, 2008, the future minimumlease payments under capital leases and operating leases are as follows:

 
| ** **                                                  | ** ** | ** **                       | ** ** | **Operating lease payments** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| ** **                                                  | ** ** | ** **                       | ** ** | **Land and buildings**       | ** ** | **Vehicles and** | ** ** | ** ** | ** ** |
| **Years ending December 31 (millions)** | ** ** | **Capital lease  payments** | ** ** | **Rent**                               | ** ** | **Occupancy  costs** | ** ** | **Gross** | ** ** | **other  equipment** | ** ** | **Total** | ** ** |
| 2009                                                        |       | $                                | 3          |                                   | $          | 156 |   | $ | 82 |   | $ | 238 |   | $ | 23 |   | $ | 261 |   |
| 2010                                                        |       | 2                                |       | 155                                    |       | 83 |   | 238 |   | 19 |   | 257 |   |
| 2011                                                        |       | —                           |       | 142                                    |       | 82 |   | 224 |   | 15 |   | 239 |   |
| 2012                                                        |       | —                           |       | 133                                    |       | 79 |   | 212 |   | 8 |   | 220 |   |
| 2013                                                        |       | —                           |       | 124                                    |       | 79 |   | 203 |   | 1 |   | 204 |   |
| Total future minimum lease payments                         |       | 5                                |       |                                   |       |   |   |   |   |   |   |   |   |
| Less imputed interest                                       |       | 1                                |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital lease liability                                     |       | $                                | 6          |                                   |       |   |   |   |   |   |   |   |   |   |
|                                                             |            |                                  |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Totalfuture minimum operating lease payments at December 31, 2008, were$2,261 million. Of this amount, $2,195 million was in respect of landand buildings; approximately 60% of this amount was in respect of the Company’sfive largest leases, all of which were for office premises over various terms,with expiry dates which range from 2016 to 2026.

 

### **(c)**          Guarantees

### ** **

*Guarantees:* Canadian generally accepted accountingprinciples require the disclosure of certain types of guarantees and theirmaximum, undiscounted amounts. The maximum potential payments represent a“worst-case scenario” and do not necessarily reflect results expected by theCompany. Guarantees requiring disclosure are those obligations that requirepayments contingent on specified types of future events. In the normal courseof its operations, the Company enters into obligations that GAAP may considerto be guarantees. As defined by Canadian GAAP, guarantees subject to these disclosureguidelines do not include guarantees that relate to the future performance ofthe Company. As at December 31, 2008, the Company’s maximum undiscountedguarantee amounts, without regard for the likelihood of having to make suchpayment, were not material.

 

*Indemnification obligations:* In the normal course of operations, theCompany may provide indemnification in conjunction with certain transactions.The terms of these indemnification obligations range in duration and often arenot explicitly defined. Where appropriate, an indemnification obligation isrecorded as a liability. In many cases, there is no maximum limit on theseindemnification obligations and the overall maximum amount of the obligationsunder such indemnification obligations cannot be reasonably estimated. Otherthan obligations recorded as liabilities at the time of the transaction,historically the Company has not made significant payments under theseindemnifications.

 

Inconnection with its 2001 disposition of TELUS’ directory business, the Companyagreed to bear a proportionate share of the new owner’s increased directorypublication costs if the increased costs were to arise from a change in theapplicable CRTC regulatory requirements. The Company’s proportionate sharewould have been 80% through May 2006, declining to 40% in the nextfive-year period and then to 15% in the final five years. As well, should theCRTC take any action which would result in the owner being prevented fromcarrying on the directory business as specified in the agreement, TELUS wouldindemnify the owner in respect of any losses that the owner incurred.

 

Asat December 31, 2008, the Company had no liability recorded in respect ofindemnification obligations.

 

### **(d)**          Claims and lawsuits

### ** **

*General:* A number of claims and lawsuits (including class actions) seekingdamages and other relief are pending against the Company.  As well, the Company has received or is awareof certain intellectual property infringement claims and potential claimsagainst the Company and, in some cases, numerous other wireless carriers andtelecommunications service providers. In some instances, the matters are at apreliminary stage and the potential for liability and magnitude of potentialloss cannot be readily determined currently. It is impossible at this time forthe Company to predict with any certainty the outcome of any such claims,potential claims and lawsuits. However, subject to the foregoing limitations,management is of the opinion, based upon legal assessment and information presentlyavailable, that it is unlikely that any liability, to the extent not providedfor through insurance or otherwise, would be material in relation to theCompany’s consolidated financial position, excepting the items enumeratedfollowing.

 

****

 

58

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

*TELUS Corporation Pension Plan and TELUS EdmontonPension Plan:* Twostatements of claim were filed in the Alberta Court of Queen’s Bench on December 31,2001, and January 2, 2002, respectively, by plaintiffs alleging to beeither members or business agents of the Telecommunications Workers Union. Inone action, the plaintiffs alleged to be suing on behalf of all current orfuture beneficiaries of the TELUS Corporation Pension Plan and in theother action, the plaintiffs alleged to be suing on behalf of all current orfuture beneficiaries of the TELUS Edmonton Pension Plan. The statement of claimin the TELUS Corporation Pension Plan related action named the Company, certainof its affiliates and certain present and former trustees of theTELUS Corporation Pension Plan as defendants, and claims damages in thesum of $445 million. The statement of claim in the TELUS Edmonton PensionPlan related action named the Company, certain of its affiliates and certainindividuals who are alleged to be trustees of the TELUS Edmonton Pension Planand claims damages in the sum of $16 million. On February 19, 2002,the Company filed statements of defence to both actions and also filed noticesof motion for certain relief, including an order striking out the actions asrepresentative or class actions. On May 17, 2002, the statements of claimwere amended by the plaintiffs and include allegations, *inter alia*, that benefits providedunder the TELUS Corporation Pension Plan and the TELUS Edmonton PensionPlan are less advantageous than the benefits provided under the respectiveformer pension plans, contrary to applicable legislation, that insufficientcontributions were made to the plans and contribution holidays were taken andthat the defendants wrongfully used the diverted funds, and that administrationfees and expenses were improperly deducted. The Company filed statements ofdefence to the amended statements of claim on June 3, 2002. The Companybelieves that it has good defences to the actions. As a term of the settlementreached between TELUS Communications Inc. and the Telecommunications WorkersUnion that resulted in a collective agreement effective November 20, 2005,the Telecommunications Workers Union has agreed to not provide any direct orindirect financial or other assistance to the plaintiffs in these actions, andto communicate to the plaintiffs the Telecommunications Workers Union’s desireand recommendation that these proceedings be dismissed or discontinued. TheCompany has been advised by the Telecommunications Workers Union that theplaintiffs have not agreed to dismiss or discontinue these actions. Should thelawsuits continue because of the actions of the court, the plaintiffs or forany other reason, and theirultimate resolution differ from management’s assessment and assumptions, amaterial adjustment to the Company’s financial position and the results of itsoperations could result.

 

*Certifiedclass action:* A classaction was brought August 9, 2004, under the *Class ActionsAct* (Saskatchewan), against a number of past and present wirelessservice providers including the Company. The claim alleges that each of thecarriers is in breach of contract and has violated competition, trade practicesand consumer protection legislation across Canada in connection with thecollection of system access fees, and seeks to recover direct and punitivedamages in an unspecified amount. The class was certified on September 17,2007, by the Saskatchewan Court of Queen’s Bench. On February 20, 2008, the same courtremoved from the class all customers of the Company who are bound by anarbitration clause, applying two recent decisions of the Supreme Court ofCanada. The Company has appliedfor leave to appeal the certification decision. The Company believesthat it has good defences to the action.

 

Similar proceedings havealso been filed by, or on behalf of, plaintiffs’ counsel in other provincialjurisdictions.

 

Should the ultimate resolutionof this action differ from management’s assessments and assumptions, a materialadjustment to the Company’s financial position and the results of itsoperations could result; management’s assessments and assumptions include thata reliable estimate of the exposure cannot be made at this preliminary stage ofthe lawsuit.

 

*Uncertified class action:* A class action was brought on June 26,2008, in the Saskatchewan Court of Queen’s Bench alleging that, among otherthings, Canadian telecommunications carriers including the Company have failedto provide proper notice of 9-1-1 charges to the public and have beendeceitfully passing it off as government charges. The Plaintiffs seekrestitution and direct and punitive damages in an unspecified amount. The Companyis assessing the merits of this claim but the potential for liability andmagnitude of potential loss cannot be readily determined at this time.

 

*Emergis Inc.:* As set out in Note 16, on January 17,2008, the Company acquired all of the outstanding securities of Emergis Inc.

 

In April 2005,MultiPlan, Inc. filed in federal court in New York a complaint seeking,among other relief, compensation in excess of U.S.$64 million for damagesallegedly incurred in connection with its purchase of the U.S. health subsidiaryof Emergis Inc. The complaint alleged a variety of claims relating to the salesagreement. This lawsuit was settled during the third quarter of 2008 inconsideration for the payment by the Company of an amount ofU.S.$4 million, such amount, net of insurance coverage, approximating therelated accrual.

 

## ****

 

59

----

##  

| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

## 21            additional financial information

##  

### **(a)**          Statement of income and othercomprehensive income

** **
| **Years ended December 31 (millions)** | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|-----------|------------|------------|------------|
| **Operations expense**(1)**:**                             |       |      |       |       |       |
| Cost of sales and service                                  | ** ** | **$**     | **3,235**  |       | $          | 2,949 |   |
| Selling, general and administrative                        | ** ** | **2,580** | ** ** | 2,516      |       |
| ** **                                                 |       | **$**     | **5,815**  | ** ** | $          | 5,465 |   |
| **Advertising expense**                                    | ** ** | **$**     | **312**    | ** ** | $          | 294 |   |
| **Employee benefits expense**                              |       |      | ** ** |       |       |
| Wages and salaries(2)                                      | ** ** | **$**     | **2,226**  | ** ** | $          | 2,242 |   |
| Pensions —  defined benefit (Note 13(b))              | ** ** | **(100**  | **)**      | (96        | )          |
| Pensions —  defined contribution (Note 13(j))         | ** ** | **63**    | ** ** | 57         |       |
| Other  defined benefits (Note 13(b))                       | ** ** | **(2**    | **)**      | 4          |       |
| Restructuring  and workforce reduction (Note 7)            | ** ** | **59**    | ** ** | 19         |       |
| Other                                                      | ** ** | **140**   | ** ** | 123        |       |
| ** **                                                 |       | **2,386** | ** ** | 2,349      |       |
| Capitalized internal labour costs (Note  15(a))            | ** ** | **(371**  | **)**      | (335       | )          |
| ** **                                                 |       | **$**     | **2,015**  | ** ** | $          | 2,014 |   |

 

----

(1)             Cost of sales and service excludesdepreciation and amortization of intangible assets and includes cost of goodssold and costs to operate and maintain access to and usage of the Company’stelecommunications infrastructure. Selling, general and administrative costsinclude sales and marketing costs (including commissions), customer care, baddebt expense, real estate costs and corporate overhead costs such asinformation technology, finance (including billing services, credit andcollection), legal, human resources and external affairs.

Employee salaries, benefitsand related costs are included in one of the two components of operationsexpense to the extent that the costs are related to the component functions.

(2)             Wages and salaries include share-basedcompensation amounts of $88 (2007 — $247), as disclosed in Note 12.

 

### **(b)**          Statement of financial position

** **
| **As at December 31 ****(millions)**                                              | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **Accounts receivable**                                                                               |       |     |       |       |       |
| Customer accounts receivable                                                                          | ** ** | **$**    | **843**    | ** ** | $          | 591 |   |
| Accrued receivables — customer                                                                   | ** ** | **110**  | ** ** | 113        |       |
| Allowance for doubtful accounts                                                                       | ** ** | **(77**  | **)**      | (63        | )          |
| ** **                                                                                            |       | **876**  | ** ** | 641        |       |
| Accrued receivables — other                                                                      | ** ** | **87**   | ** ** | 67         |       |
| Other                                                                                                 | ** ** | **3**    | ** ** | 3          |       |
| ** **                                                                                            |       | **$**    | **966**    | ** ** | $          | 711 |   |
| **Inventories**                                                                                       |       |     | ** ** |       |       |
| Wireless handsets, parts and accessories                                                              | ** ** | **$**    | **268**    | ** ** | $          | 179 |   |
| Other                                                                                                 | ** ** | **65**   | ** ** | 64         |       |
| ** **                                                                                            |       | **$**    | **333**    | ** ** | $          | 243 |   |
| **Prepaid expense and other**                                                                         |       |     | ** ** |       |       |
| Prepaid expenses                                                                                      | ** ** | **$**    | **109**    | ** ** | $          | 118 |   |
| Deferred customer activation and connection  costs                                                    | ** ** | **44**   | ** ** | 39         |       |
| Other                                                                                                 | ** ** | **67**   | ** ** | 43         |       |
| ** **                                                                                            |       | **$**    | **220**    | ** ** | $          | 200 |   |
| **Deferred charges**                                                                                  |       |     | ** ** |       |       |
| Recognized transitional pension assets and  pension plan contributions in excess of charges to income | ** ** | **$**    | **1,401**  | ** ** | $          | 1,194 |   |
| Deferred customer activation and connection  costs                                                    | ** ** | **95**   | ** ** | 109        |       |
| Other                                                                                                 | ** ** | **17**   | ** ** | 15         |       |
| ** **                                                                                            |       | **$**    | **1,513**  | ** ** | $          | 1,318 |   |

 

****

 

60

----

 
| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 
| **As at December 31 ****(millions)**                           | ** ** | **2008**  | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **Accounts payable and accrued liabilities**                                       |       |      |       |     |       |
| Accrued liabilities                                                                | ** ** | **$**     | **527**    |     | $          | 447 |   |
| Payroll and other employee-related  liabilities                                    | ** ** | **347**   |       | 422      |       |
| Accrual for net-cash settlement feature for  share option awards (Note 12(b)) | ** ** | **27**    |       | 82       |       |
| Asset retirement obligations                                                       | ** ** | **3**     |       | 4        |       |
| ** **                                                                         |       | **904**   |       | 955      |       |
| Trade accounts payable                                                             | ** ** | **441**   |       | 406      |       |
| Interest payable                                                                   | ** ** | **58**    |       | 51       |       |
| Other                                                                              | ** ** | **62**    |       | 64       |       |
| ** **                                                                         |       | **$**     | **1,465**  |     | $          | 1,476 |   |
| **Advance billings and customer deposits**                                         |       |      |       |     |       |
| Advance billings                                                                   | ** ** | **$**     | **475**    |     | $          | 409 |   |
| Regulatory deferral accounts (Note 20(a))                                          | ** ** | **146**   |       | 147      |       |
| Deferred customer activation and connection  fees                                  | ** ** | **44**    |       | 39       |       |
| Customer deposits                                                                  | ** ** | **24**    |       | 37       |       |
| ** **                                                                         |       | **$**     | **689**    |     | $          | 632 |   |
| **Other long-term liabilities**                                                    |       |      |       |     |       |
| Derivative liabilities (Notes 5(h),  18(b))                                   | ** ** | **$**     | **785**    |     | $          | 1,183 |   |
| Pension and other post-retirement  liabilities                                     | ** ** | **210**   |       | 208      |       |
| Other                                                                              | ** ** | **108**   |       | 116      |       |
| ** **                                                                         |       | **1,103** |       | 1,507    |       |
| Deferred customer activation and connection  fees                                  | ** ** | **95**    |       | 109      |       |
| Deferred gain on sale-leaseback of  buildings                                      | ** ** | **54**    |       | 62       |       |
| Asset retirement obligations                                                       | ** ** | **43**    |       | 40       |       |
| ** **                                                                         |       | **$**     | **1,295**  |     | $          | 1,718 |   |

 

### **(c)**          Supplementary cash flow information

 
| **Years ended December 31 (millions)**                                          | ** ** | **2008**   | ** **  | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **Net change in non-cash working capital**                                                          |       |       |        |       |       |
| Short-term investments                                                                              | ** ** | **$**      | **42**      | ** ** | $          | 68 |   |
| Accounts receivable                                                                                 | ** ** | **(217**   | **)**       | (32        | )          |
| Inventories                                                                                         | ** ** | **(90**    | **)**       | (19        | )          |
| Prepaid expenses and other                                                                          | ** ** | **(15**    | **)**       | (4         | )          |
| Accounts payable and accrued liabilities                                                            | ** ** | **(31**    | **)**       | 6          |       |
| Income and other taxes receivable and  payable, net                                                 | ** ** | **253**    | ** **  | (19        | )          |
| Advance billings and customer deposits                                                              | ** ** | **57**     | ** **  | 25         |       |
| ** **                                                                                          |       | **$**      | **(1**      | **)**      | $          | 25 |   |
| **Long-term debt issued**                                                                           |       |       | ** **  |       |       |
| TELUS Corporation Commercial Paper                                                                  | ** ** | **$**      | **7,831**   | ** ** | $          | 5,962 |   |
| TELUS Corporation Credit Facility                                                                   | ** ** | **4,652**  | ** **  | 801        |       |
| Long-term debt other than TELUS Corporation  Commercial Paper and TELUS Corporation Credit Facility | ** ** | **500**    | ** **  | 1,000      |       |
| ** **                                                                                          |       | **$**      | **12,983**  | ** ** | $          | 7,763 |   |
| **Redemptions and repayment of long-term debt**                                                     | ** ** | ** ** | ** **  | ** ** | ** ** |
| TELUS Corporation Commercial Paper                                                                  | ** ** | **$**      | **(7,985**  | **)**      | $          | (5,377 | ) |
| TELUS Corporation Credit Facility                                                                   | ** ** | **(3,674** | **)**       | (921       | )          |
| Long-term debt other than TELUS Corporation  Commercial Paper and TELUS Corporation Credit Facility | ** ** | **(8**     | **)**       | (1,559     | )          |
| ** **                                                                                          |       | **$**      | **(11,667** | **)**      | $          | (7,857 | ) |
| **Interest (paid)**                                                                                 |       |       | ** **  |       |       |
| Amount paid in respect of interest expense                                                          | ** ** | **$**      | **(457**    | **)**      | $          | (444 | ) |
| Forward starting interest rate swap  agreement termination payments                                 | ** ** | **—** | ** **  | (10        | )          |
| ** **                                                                                          |       | **$**      | **(457**    | **)**      | $          | (454 | ) |

 

## ****

 

61

----

##  

| notes to consolidated financial statements |   |   |
|--------------------------------------------|--------|--------|

 

## 22                        differences between Canadian and United Statesgenerally accepted accounting principles

##  

The consolidated financial statements have been preparedin accordance with Canadian GAAP. As discussed further in Note 2(a), CanadianGAAP is being converged with IFRS-IASB. The United States Securities andExchange Commission, effective March 4, 2008, will no longer requirecertain reporting issuers, such as the Company, to reconcile their financialstatements included in their filings with the United States Securities andExchange Commission and prepared in accordance with IFRS-IASB toU.S. GAAP. Upon the commencement of presenting the Company’s financialstatements in accordance with IFRS-IASB, the Company currently expects that itwill cease reconciling its financial statements to U.S. GAAP.

 

The principles currently adopted in these financialstatements conform in all material respects to those generally accepted in theUnited States except as summarized below. Significant differences betweenCanadian GAAP and U.S. GAAP would have the following effect on reportednet income of the Company:

 
| **Years ended December 31 (millions except per share amounts)** | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Net income in accordance with Canadian GAAP                                                             | ** ** | **$**     | **1,128**  | ** ** | $          | 1,258 |   |
| Adjustments:                                                                                            |       |      | ** ** |       |       |
| Operating expenses                                                                                      |       |      | ** ** |       |       |
| Operations (b)                                                                                          | ** ** | **(62**   | **)**      | (23        | )          |
| Amortization of intangible assets (c)                                                                   | ** ** | **(50**   | **)**      | (50        | )          |
| Taxes on the above adjustments and tax rate  changes (e)                                           | ** ** | **42**    | ** ** | 69         |       |
| Net income in accordance with  U.S. GAAP                                                           | ** ** | **1,058** | ** ** | 1,254      |       |
| Other comprehensive income (loss), net of  taxes (f)                                                    |       |      | ** ** |       |       |
| In accordance with Canadian GAAP                                                                        | ** ** | **(26**   | **)**      | 74         |       |
| Change in pension related other  comprehensive income accounts                                          | ** ** | **(225**  | **)**      | 109        |       |
| In accordance with U.S. GAAP                                                                       | ** ** | **(251**  | **)**      | 183        |       |
| Comprehensive income in accordance with  U.S. GAAP                                                 | ** ** | **$**     | **807**    | ** ** | $          | 1,437 |   |
| Net income in accordance with  U.S. GAAP per Common Share and Non-Voting Share                     |       |      | ** ** |       |       |
| - Basic                                                                                                 | ** ** | **$**     | **3.30**   | ** ** | $          | 3.78 |   |
| - Diluted                                                                                               | ** ** | **$**     | **3.29**   | ** ** | $          | 3.75 |   |

 

The following is an analysis of retained earnings(deficit) reflecting the application of U.S. GAAP:

 
| **Years ended December 31 (millions)**                   | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Schedule of retained earnings (deficit)  under U.S. GAAP                |       |      | ** ** |       |       |
| Balance at beginning of period                                               | ** ** | **$**     | **(61**    | **)**      | $          | (420 | ) |
| Net income in accordance with  U.S. GAAP                                | ** ** | **1,058** | ** ** | 1,254      |       |
| ** **                                                                   |       | **997**   | ** ** | 834        |       |
| Common Share and Non-Voting Share dividends  paid, or payable, in cash       | ** ** | **(584**  | **)**      | (521       | )          |
| Purchase of Common Shares and Non-Voting  Shares in excess of stated capital | ** ** | **(89**   | **)**      | (374       | )          |
| Balance at end of period                                                     | ** ** | **$**     | **324**    | ** ** | $          | (61 | ) |

 

The following is an analysis of major statement offinancial position categories reflecting the application of U.S. GAAP:

 
| **As at December 31 ****(millions)** | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|----------------------------------------------------------|------------|-----------|------------|------------|------------|
| Current Assets                                           | ** ** | **$**     | **1,558**  | ** ** | $          | 1,341 |   |
| Capital Assets                                           |       |      | ** ** |       |       |
| Property, plant, equipment and other                     | ** ** | **7,317** | ** ** | 7,196      |       |
| Intangible assets subject to amortization                | ** ** | **2,824** | ** ** | 2,516      |       |
| Intangible assets with indefinite lives                  | ** ** | **3,849** | ** ** | 2,967      |       |
| Other Assets                                             | ** ** | **734**   | ** ** | 932        |       |
| Goodwill                                                 | ** ** | **3,966** | ** ** | 3,570      |       |
| ** **                                               |       | **$**     | **20,248** | ** ** | $          | 18,522 |   |
| Current Liabilities                                      | ** ** | **$**     | **3,057**  | ** ** | $          | 2,686 |   |
| Long-Term Debt                                           | ** ** | **6,376** | ** ** | 4,614      |       |
| Other Long-Term Liabilities                              | ** ** | **1,256** | ** ** | 1,718      |       |
| Deferred Income Taxes                                    | ** ** | **1,444** | ** ** | 1,349      |       |
| Non-Controlling Interest                                 | ** ** | **23**    | ** ** | 26         |       |
| Shareholders’ Equity                                | ** ** | **8,092** | ** ** | 8,129      |       |
| ** **                                               |       | **$**     | **20,248** | ** ** | $          | 18,522 |   |

** **

****

 

62

----

 

notes to consolidated financialstatements

 

Thefollowing is a reconciliation of shareholders’ equity incorporating thedifferences between Canadian and U.S. GAAP:

 
| ** **                                                      | ** ** | **Shareholders’ Equity** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|
| **As at December 31, 2008 (millions)** | ** ** | **Common  Shares**                 | ** ** | **Non-Voting  Shares** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Contributed  surplus** | ** ** | **Total** | ** ** |
| Under Canadian GAAP                                             |       | $                                  | 2,216      |   | $ | 3,069 |   | $ | 1,859 |   | $ | (130 | ) | $ | 168 |   | $ | 7,182 |   |
| Adjustments:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d)               |       | 1,732                              |       | 883 |   | (1,438 | ) | (390 | ) | — |   | 787 |   |
| Share-based compensation (b)                                    |       | 10                                 |       | 53 |   | (93 | ) | — |   | 30 |   | — |   |
| Acquisition of Clearnet Communications Inc.                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                                    |       | —                             |       | 131 |   | (8 | ) | — |   | — |   | 123 |   |
| Convertible debentures                                          |       | —                             |       | (3 | ) | 4 |   | — |   | (1 | ) | — |   |
| Under U.S. GAAP                                            |       | $                                  | 3,958      |   | $ | 4,133 |   | $ | 324 |   | $ | (520 | ) | $ | 197 |   | $ | 8,092 |   |

 
| ** **                                                      | ** ** | **Shareholders’ Equity** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|
| **As at December 31, 2007 (millions)** | ** ** | **Common  Shares**                 | ** ** | **Non-Voting  Shares** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Contributed  surplus** | ** ** | **Total** | ** ** |
| Under Canadian GAAP                                             |       | $                                  | 2,228      |   | $ | 3,192 |   | $ | 1,458 |   | $ | (104 | ) | $ | 152 |   | $ | 6,926 |   |
| Adjustments:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Merger of BC TELECOM and TELUS (a), (c), (d)               |       | 1,741                              |       | 922 |   | (1,418 | ) | (165 | ) | — |   | 1,080 |   |
| Share-based compensation (b)                                    |       | 10                                 |       | 55 |   | (97 | ) | — |   | 32 |   | — |   |
| Acquisition of Clearnet Communications Inc.                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill (d)                                                    |       | —                             |       | 131 |   | (8 | ) | — |   | — |   | 123 |   |
| Convertible debentures                                          |       | —                             |       | (3 | ) | 4 |   | — |   | (1 | ) | — |   |
| Under U.S. GAAP                                            |       | $                                  | 3,979      |   | $ | 4,297 |   | $ | (61 | ) | $ | (269 | ) | $ | 183 |   | $ | 8,129 |   |

 

### **(a)**          Merger of BC TELECOM and TELUS

### ** **

Thebusiness combination between BC TELECOM and TELUS Corporation (renamedTELUS Holdings Inc., which was wound up June 1, 2001) was accounted forusing the pooling of interests method under Canadian GAAP. Under Canadian GAAP,the application of the pooling of interests method of accounting for the mergerof BC TELECOM and TELUS Holdings Inc. resulted in a restatement of priorperiods as if the two companies had always been combined. Under U.S. GAAP,the merger is accounted for using the purchase method. Use of the purchasemethod resulted in TELUS (TELUS Holdings Inc.) being acquired by BC TELECOM for$4,662 million (including merger related costs of $52 million)effective January 31, 1999.

 

### **(b)**          Operating expenses – Operations

### ** **

*Future employee benefits:* Under U.S. GAAP, TELUS’ future employeebenefit assets and obligations have been recorded at their fair values onacquisition. Accounting for future employee benefits under Canadian GAAPchanged to become more consistent with U.S. GAAP effective January 1,2000. Canadian GAAP provides that the transitional balances can be accountedfor prospectively. Therefore, to conform to U.S. GAAP, the amortization ofthe transitional amount needs to be removed from the future employee benefitexpense.

 

Unlike Canadian GAAP, U.S. GAAP requires thefull recognition of obligations associated with its employee future benefitplans as prescribed by Financial Accounting Standards Board Statement ofFinancial Accounting Standard No. 158, *Employers’ Accounting forDefined Benefit Pension and other Postretirement Plans*. Applyingthis standard, the funded status of the Company’s plans is shown gross on theconsolidated statements of financial position and the difference between the netfunded plan states and the net accrued benefit asset or liability is includedas a component of accumulated other comprehensive income.

 

*Share-basedcompensation:* Both Canadian GAAP and U.S. GAAP require the use of thefair value method of accounting for share-based compensation for awards madeafter 2001 and 1994, respectively.

 

On a prospective basis, commencing January 1, 2006,there is no longer a difference between Canadian GAAP and U.S. GAAPshare-based compensation expense recognized in the results of operationsarising from current share-based compensation awards accounted for as equityinstruments. As share option awards granted subsequent to 1994 and prior to2002 are captured by U.S. GAAP, but are not captured by Canadian GAAP,differences in shareholders’ equity accounts arising from these awards willcontinue.

 

****

 

63

----

 

notes to consolidated financialstatements

 

Substantially all of the Company’s outstanding shareoption awards that were granted prior to January 1, 2005, have a net-cashsettlement feature; the optionee has the choice of exercising the net-cashsettlement feature. The affected outstanding share option awards largely takeon the characteristics of liability instruments rather than equity instruments;the minimum expense recognized for the affected share option awards will betheir grant-date fair values. Under U.S. GAAP, the grant-date fair valuesof affected outstanding share option awards granted subsequent to 1994 affectthe transitional amount whereas Canadian GAAP only considers grant-date fairvalues for affected outstanding share option awards granted subsequent to 2001;for the year ended December 31, 2008, this resulted in the U.S. GAAPexpense being greater than the Canadian GAAP expense by $NIL (2007 –$25 million).

 

### **(c)**          Operating expenses – Amortization of intangible assets

 

As TELUS’ intangible assets on acquisition have beenrecorded at their fair value (see (a)), amortization of such assets, other thanfor those with indefinite lives, needs to be included under U.S. GAAP;consistent with prior years, amortization is calculated using the straight-linemethod.

 

The incremental amountsrecorded as intangible assets arising from the TELUS acquisition above are asfollows:

 
| ** **                                               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net book value** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------|------------|------------------------------|------------|
| **As at December 31 ****(millions)** | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| Intangible assets subject to amortization                |       |       |       |             |       |                         |       |   |   |
| Subscribers – wireline                              |       | $          | 1,950      |             | $          | 443                          | ** ** | **$** | **1,507** |   | $ | 1,557 |   |
| Intangible assets with indefinite lives                  |       |       |       |             |       |                         |       |   |   |
| Spectrum licences(1)                                     |       | 1,833      |       | 1,833            | ** ** | **—**                   |       | — |   |
|                                                     |       | $          | 3,783      |             | $          | 2,276                        | ** ** | **$** | **1,507** |   | $ | 1,557 |   |

 

----

(1)             Accumulated amortization of spectrum licencesis amortization recorded prior to 2002 and the transitional impairment amount.

 

Estimated aggregate amortization expense forintangible assets subject to amortization, calculated upon such assets held asat December 31, 2008, for each of the next five fiscal years is asfollows:

 
| **Years ending December 31 (millions)** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
| 2009                                                        | ** ** | **$**      | **394**    | ** ** |
| 2010                                                        | ** ** | **302**    | ** ** |
| 2011                                                        | ** ** | **202**    | ** ** |
| 2012                                                        | ** ** | **131**    | ** ** |
| 2013                                                        | ** ** | **116**    | ** ** |
|                                                             |            |            |            |  |

 

### **(d)**          Goodwill

### ** **

*Merger of BC TELECOM and TELUS:*Under the purchase method of accounting,TELUS’ assets and liabilities at acquisition (see (a)) have been recorded attheir fair values with the excess purchase price being allocated to goodwill inthe amount of $403 million. Commencing January 1, 2002, rather thanbeing systematically amortized, the carrying value of goodwill is periodicallytested for impairment.

 

*Additionalgoodwill on Clearnet purchase:* Under U.S. GAAP, shares issued by the acquirer to effect anacquisition are measured at the date the acquisition was announced; however,under Canadian GAAP, at the time the transaction took place, shares issued toeffect an acquisition were measured at the transaction date. This results inthe purchase price under U.S. GAAP being $131 million higher thanunder Canadian GAAP. The resulting difference is assigned to goodwill.Commencing January 1, 2002, rather than being systematically amortized,the carrying value of goodwill is periodically tested for impairment.

 

### **(e)**          Income taxes

 
| **Years ended December 31 (millions)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current                                                    | ** ** | **$**    | **275**    |     | $          | (144 | ) |
| Deferred                                                   | ** ** | **131**  |       | 309      |       |
| ** **                                                 |       | **406**  |       | 165      |       |
| Investment Tax Credits                                     | ** ** | **(12**  | **)**      | (11      | )          |
| ** **                                                 |       | **$**    | **394**    |     | $          | 154 |   |

 

****

 

64

----

 

notes to consolidated financialstatements

 

TheCompany’s income tax expense, for U.S. GAAP purposes, differs from thatcalculated by applying statutory rates for the following reasons:

 
| **Years ended December 31 ($ in millions)**                            | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Basic blended federal and provincial tax at  statutory income tax rates                              | ** ** | **$**    | **451**    | ** ** | **31.0**   | **%** | $ | 475 |   | 33.6 | % |
| Revaluation of deferred income tax  liability to reflect future statutory income tax rates           | ** ** | **(40**  | **)**      | ** ** |       | (213 | ) |   |   |
| Tax rate differential on, and consequential  adjustments from, reassessment of prior year tax issues | ** ** | **(21**  | **)**      | ** ** |       | (79 | ) |   |   |
| Share option award compensation                                                                      | ** ** | **6**    | ** ** | ** ** |       | (12 | ) |   |   |
| Investment Tax Credits, net of tax                                                                   | ** ** | **(8**   | **)**      | ** ** |       | (7 | ) |   |   |
| Other                                                                                                | ** ** | **6**    | ** ** | ** ** |       | (10 | ) |   |   |
| U.S. GAAP income tax expense                                                                    | ** ** | **$**    | **394**    | ** ** | **27.1**   | **%** | $ | 154 |   | 10.9 | % |

 

As referred to in Note 1(b), the Company mustmake significant estimates in respect of the composition of its deferred incometax asset and deferred income tax liability. The operations of the Company arecomplex, and related tax interpretations, regulations and legislation arecontinually changing. As a result, there are usually some tax matters inquestion. Temporary differences comprising the deferred income tax liabilityare estimated as follows:

 
| **As at December 31**** (millions)**                         | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Capital assets                                                                   |       |       |       |     |       |
| Property, plant, equipment, other and  intangible assets subject to amortization | ** ** | **$**      | **(559**   | **)**    | $          | (474 | ) |
| Intangible assets with indefinite lives                                          | ** ** | **(830**   | **)**      | (746     | )          |
| Partnership income unallocated for income  tax purposes                          | ** ** | **(556**   | **)**      | (631     | )          |
| Net pension and share-based compensation  amounts                                | ** ** | **(92**    | **)**      | (97      | )          |
| Reserves not currently deductible                                                | ** ** | **70**     |       | 71       |       |
| Losses available to be carried forward                                           | ** ** | **44**     |       | 18       |       |
| Other                                                                            | ** ** | **20**     |       | 6        |       |
| ** **                                                                       |       | **$**      | **(1,903** | **)**    | $          | (1,853 | ) |
| Deferred income tax liability                                                    |       |       |       |     |       |
| Current                                                                          | ** ** | **$**      | **(459**   | **)**    | $          | (504 | ) |
| Non-current                                                                      | ** ** | **(1,444** | **)**      | (1,349   | )          |
| Deferred income tax asset (liability)                                            | ** ** | **$**      | **(1,903** | **)**    | $          | (1,853 | ) |

 

Effective January 1, 2007, the Company adoptedthe method of accounting for uncertain income tax positions prescribed byFinancial Accounting Standards Board Financial Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*.  This Interpretation is intended tostandardize accounting practice for the recognition, derecognition andmeasurement of tax benefits to enable consistency and comparability amongreporting entities for the reporting of income tax assets and liabilities. Noconsequential adjustments were required in the Company’s financial statementsas a result of that adoption.

 

The total amount of unrecognized tax benefits,excluding net capital losses, that, if recognized, would affect the effectivetax rate at December 31, 2008, is $221 million (2007 –$196 million). Unrecognized tax benefits related to net capital losses, ifrecognized, amount to $156 million (2007 – $162 million), of which$12 million (2007 – $NIL) would have affected the effective tax rate for theyear ended December 31, 2008.

 

The gross amount of unrecognized tax benefits iscalculated as the undiscounted cumulative impact of such positions on taxableincome before timing-related reversals that have yet to be realized and beforethe application of losses carried forward multiplied by the applicable tax ratefor the estimated period when such benefit will be realized.

 

****

 

65

----

 

notes to consolidated financialstatements

 
| ** **                                                                  | ** ** | **2008**                                | ** ** | **2007**                                                       | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Unrecognized tax benefits** | ** ** | **Unrecognized tax benefits**                        | ** ** |
| **Years ended December 31 (millions)**                  | ** ** | **Gross**                               | ** ** | **Component  sheltered by  losses carried  forward** | ** ** | **Component  comprised of  capital losses** | ** ** | **Gross** | ** ** | **Component  sheltered by  losses carried  forward** | ** ** | **Component  comprised of  capital losses** | ** ** |
| Balance, beginning of period                                                | ** ** | **$**                                   | **951**    | ** **                                                     | **$**      | **630** | ** ** | **$** | **162** |   | $ | 848 |   | $ | 368 |   | $ | 186 |   |
| Tax positions related to prior years                                        |       |                                    |       |                                                           |       |   |   |   |   |   |   |   |   |
| Additions for tax returns filed during the  year, less prior year estimates |       | **7**                                   |       | **(11**                                                        | **)**      | **—** |   | 222 |   | 168 |   | — |   |
| ** **                                                                  | ** ** | **958**                                 | ** ** | **619**                                                        | ** ** | **162** |   | 1,070 |   | 536 |   | 186 |   |
| Tax positions related to prior years                                        |       |                                    |       |                                                           |       |   |   |   |   |   |   |   |   |
| Reduction for timing items deductible in  the year                     | ** ** | **(119**                                | **)**      | **(119**                                                       | **)**      | **—** |   | (49 | ) | (49 | ) | — |   |
| Acquisitions                                                                | ** ** | **25**                                  | ** ** | **28**                                                         | ** ** | **—** |   | — |   | — |   | — |   |
| Other changes in estimates                                                  | ** ** | **52**                                  | ** ** | **(10**                                                        | **)**      | **—** |   | — |   | — |   | — |   |
| Tax positions related to current year                                       |       |                                    |       |                                                           |       |   |   |   |   |   |   |   |   |
| Estimated additions                                                         | ** ** | **71**                                  | ** ** | **69**                                                         | ** ** | **—** |   | 110 |   | 110 |   | — |   |
| Reductions                                                                  | ** ** | **—**                              | ** ** | **—**                                                     | ** ** | **—** |   | — |   | — |   | — |   |
| Settlements                                                                 | ** ** | **(94**                                 | **)**      | **(57**                                                        | **)**      | **—** |   | (135 | ) | 50 |   | — |   |
| Current period reduction in losses                                          | ** ** | **—**                              | ** ** | **(207**                                                       | **)**      | **—** |   | — |   | — |   | — |   |
| Lapses in statutes of limitations                                           | ** ** | **(12**                                 | **)**      | **(7**                                                         | **)**      | **—** |   | (4 | ) | — |   | — |   |
| Adjustments for tax rate changes                                            | ** ** | **(14**                                 | **)**      | **(6**                                                         | **)**      | **(6** | ) | (41 | ) | (17 | ) | (24 | ) |
| Balance, end of period                                                      | ** ** | **$**                                   | **867**    | ** **                                                     | **$**      | **310** | ** ** | **$** | **156** |   | $ | 951 |   | $ | 630 |   | $ | 162 |   |

 

Included in the balance at December 31, 2008and 2007, excluding net capital losses, are tax positions for which theultimate deductibility is highly certain but for which there is uncertainty aboutthe timing of such deductibility. In addition, the Company has losses carriedforward that are available to be applied against unrecognized tax benefits. Asa result, the impact on the annual effective tax rate is significantly lessthan the gross amount of gross unrecognized tax benefits noted above.

 

The gross reserves are adjusted for tax rate changesapplicable to current and future taxation years based on the expected timing ofloss utilization.

 

In the application of both Canadian GAAP and U.S.GAAP, the Company accrues for interest charges on current tax liabilities thathave not been funded, which would include interest and penalties arising fromuncertain tax positions. The Company includes such charges as a component ofFinancing costs. As at January 1, 2007, the Company had recorded accruedinterest payable of $8 million in respect of differences between the timestax-related exposures have been funded compared to the times the tax-relatedexposures may have come into existence, as well as interest receivable of$9 million. During the year ended December 31, 2008, the Companyrecorded interest income of $8 million (2007 – $26 million) in respect ofincome taxes, recorded interest expense of $5 million (2007 – $NIL),reversed interest expense of $NIL (2007 – $4 million) and collected$1 million (2007 – $34 million) of interest receivable.

 

As at December 31, 2008, it is reasonablypossible that the Company’s net unrecognized tax benefits will significantlyincrease and decrease in the next twelve months for the following items:

 

·                  It is expected that Notices of Reassessmentwill be issued and/or settlements will be reached with various governmentauthorities over the next twelve months that are expected to effectively settlea number of uncertain tax positions and result in adjustments to the effectivetax rate and gross unrecognized tax benefits including the abandonment of anyremaining unrecognized tax benefits. Certain presently unrecognized taxbenefits pertain to a number of items involving uncertainty as to the exacttaxation period tax deductions may be claimed among periods of changingstatutory tax rates.  It is estimated thegross amount of the unrecognized tax benefits that are expected to be resolvedranges from $120 million to $140 million (2007 – $25 million to$35 million).

·                  For those items that are timing in nature, itis reasonably possible that the gross unrecognized tax benefits will decreaseby $50 million to $60 million (2007 – $70 million to$80 million) as temporary differences are drawn down.

·                  It is reasonably possible that the Company’snet and gross unrecognized tax benefits will decrease due to the expected lapseof the statute of limitations that would otherwise allow governmentalauthorities to challenge positions taken in tax returns for certain prior taxationyears. Such unrecognized tax benefits are reasonably estimated at$1 million (2007 – $2 million).

·                  During the next twelve months, the Companywill file tax returns covering the period ended December 31, 2008, asrequired by statute. The returns are likely to contain unrecognized taxbenefits that are different than what has been

 

****

 

66

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notes toconsolidated financial statements

 

quantified above. As thepositions will only be finalized at the time the tax returns are prepared, theamount of such benefits cannot be estimated with certainty prior to that time.

 

As at December 31, 2008, income tax returns,whether filed or not, pertaining to taxation years that remain open toexamination by major jurisdictions are as follows:

 
| ** **                           | ** ** | **2008**                        | ** ** | **2007**               | ** ** |
|--------------------------------------|------------|---------------------------------|------------|------------------------|------------|
| **As at December 31** | ** ** | **Restricted to  appeals** | ** ** | **Other**              | ** ** | **Restricted to  appeals** | ** ** | **Other** | ** ** |
| Canada – Federal                |       | 1999 – 2001, 2003          |       | 2002, 2004 – 2008 |       | 1999 – 2000 |   | 2001 – 2007 |   |
| Canada – provincial             |       | 1999 – 2000                |       | 2001 – 2008       |       | 1999 – 2000 |   | 2001 – 2007 |   |
| United States                   |       | N/A                             |       | 2005 – 2008       |       | N/A |   | 2004 – 2007 |   |

 

### **(f)**            Comprehensive income (loss)

### ** **

U.S. GAAPrequires that a statement of comprehensive income be displayed with the sameprominence as other financial statements. Comprehensive income, whichincorporates net income, includes all changes in equity during a period exceptthose resulting from investments by and distributions to owners.

 
| ** **                                                          | ** ** | **2008**                                                         | ** ** | **2007**                                        | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Years ended December 31 (millions)**          | ** ** | **Canadian  GAAP other  comprehensive  income (loss)** | ** ** | **Pension and  other benefit  plans** | ** ** | **U.S. GAAP  other  comprehensive  income (loss)** | ** ** | **Canadian  GAAP other  comprehensive  income (loss)** | ** ** | **Pension and  other benefit  plans** | ** ** | **U.S. GAAP  other  comprehensive  income (loss)** | ** ** |
| Amount arising                                                      | ** ** | **$**                                                            | **(35**    | **)**                                           | **$**      | **(307** | **)** | **$** | **(342** | **)** | $ | 115 |   | $ | 154 |   | $ | 269 |   |
| Income tax expense (recovery)                                       | ** ** | **(9**                                                           | **)**      | **(82**                                         | **)**      | **(91** | **)** | 41 |   | 45 |   | 86 |   |
| Net                                                                 | ** ** | **(26**                                                          | **)**      | **(225**                                        | **)**      | **(251** | **)** | 74 |   | 109 |   | 183 |   |
| Accumulated other comprehensive income  (loss), beginning of period | ** ** | **(104**                                                         | **)**      | **(165**                                        | **)**      | **(269** | **)** | (178 | ) | (274 | ) | (452 | ) |
| Accumulated other comprehensive income  (loss), end of period       | ** ** | **$**                                                            | **(130**   | **)**                                           | **$**      | **(390** | **)** | **$** | **(520** | **)** | $ | (104 | ) | $ | (165 | ) | $ | (269 | ) |

 

Theclosing accumulated other comprehensive income amounts in respect of componentsof net periodic benefit costs not yet recognized, and the amounts expected tobe recognized in fiscal 2009, are as follows:

 
| ** **                                           | ** ** | **2008**                                                           | ** ** | **2007**                          | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **Accumulated other comprehensive  income amounts** | ** ** | **Amounts  expected  to be** | ** ** | **Accumulated other comprehensive  income amounts** | ** ** |
| ** **                                           | ** ** | ** **                                                         | ** ** | **Tax**                           | ** ** | ** ** | ** ** | **recognized** | ** ** | ** ** | ** ** | **Tax** | ** ** | ** ** | ** ** |
| **As at December 31 (millions)** | ** ** | **Gross**                                                          | ** ** | **effect**                        | ** ** | **Net** | ** ** | **in 2009** | ** ** | **Gross** | ** ** | **effect** | ** ** | **Net** | ** ** |
| **Pension benefit plans**                            |       |                                                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)                | ** ** | **$**                                                              | **938**    | ** **                        | **$**      | **277** | ** ** | **$** | **661** | ** ** | $ | 36 |   | $ | 629 |   | $ | 197 |   | $ | 432 |   |
| Unamortized past service costs                       | ** ** | **33**                                                             | ** ** | **11**                            | ** ** | **22** | ** ** | 4 |   | 31 |   | 10 |   | 21 |   |
| Unamortized business combination difference          | ** ** | **(413**                                                           | **)**      | **(128**                          | **)**      | **(285** | **)** | 5 |   | (412 | ) | (130 | ) | (282 | ) |
| ** **                                           | ** ** | **558**                                                            | ** ** | **160**                           | ** ** | **398** | ** ** | 45 |   | 248 |   | 77 |   | 171 |   |
| **Other benefit plans**                              |       |                                                               |       |                              |       |   | ** ** |   |   |   |   |   |   |   |   |
| Unamortized net actuarial loss (gain)                | ** ** | **(12**                                                            | **)**      | **(3**                            | **)**      | **(9** | **)** | (2 | ) | (10 | ) | (3 | ) | (7 | ) |
| Unamortized business combination difference          | ** ** | **1**                                                              | ** ** | **—**                        | ** ** | **1** | ** ** | 1 |   | 2 |   | 1 |   | 1 |   |
| ** **                                           | ** ** | **(11**                                                            | **)**      | **(3**                            | **)**      | **(8** | **)** | (1 | ) | (8 | ) | (2 | ) | (6 | ) |
| ** **                                           | ** ** | **$**                                                              | **547**    | ** **                        | **$**      | **157** | ** ** | **$** | **390** | ** ** | $ | 44 |   | $ | 240 |   | $ | 75 |   | $ | 165 |   |

 

### **(g)**         Recently issued accounting standards notyet implemented

### ** **

*Business combinations and non-controlling interests:* UnderU.S. GAAP, effective for its 2009 fiscal year, the Company will be requiredto comply with new standards in respect of business combinations and accountingfor non-controlling interests, as prescribed by Financial Accounting Standards Board Statement of Financial AccountingStandards No. 141(R), *Business Combinations,*and Financial Accounting Standards Board Statement of Financial AccountingStandards No. 160, *Accounting and Reportingof Noncontrolling Interest in Consolidated Financial Statements, an amendmentof ARB No. 51*, respectively. The issuance of thesestandards is the culmination of the first major collaborative convergenceundertaking of the Financial Accounting Standards Board and the InternationalAccounting Standards Board. Whether the

 

****

 

67

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notes toconsolidated financial statements

 

Companywould be materially affected by the new standards would depend upon thespecific facts of the business combinations, if any, occurring on or after January 1,2009. Generally, the new standards will result in measuring business acquisitionsat the fair value of the acquired entities and a prospectively applied shiftfrom a parent company conceptual view of consolidation (which results in theparent company recording the book values attributable to non-controllinginterests) to an entity conceptual view (which results in the parent companyrecording the fair values attributable to non-controlling interests). Earlyadoption of these standards is prohibited. As discussed further in Note 2(e),effective January 1, 2009, the Company early adopted the corresponding newCanadian standards.

 

*Derivative instrument disclosurerequirements:* Under U.S. GAAP, effective for its 2009 fiscalyear, the Company will be required to comply with new standards in respect ofderivative instrument disclosures, as prescribed by Financial Accounting Standards BoardStatement of Financial Accounting Standards No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133*. The Financial Accounting Standards Boardnotes that there are a number of similarities between the disclosures requiredunder the new standard and those required under International FinancialReporting Standard, *Financial Instruments:Disclosure*(IFRS 7), but that the new standard was developedunder a more limited scope of derivatives and non-derivative hedginginstruments than was IFRS 7 (the changes in financial instrumentdisclosures referred to in Note 2(b) were the result of Canada’sAccounting Standards Board’s converging Canadian GAAP with IFRS 7). TheCompany will not be materially affected by the provisions of this standard.

 

*Other:*As would affect the Company, there are noother U.S. accounting standards currently issued and not yet implemented thatwould differ from Canadian accounting standards currently issued and not yetimplemented.

 

****

 

68

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**TELUS CORPORATION**

 

**Management’sdiscussion and analysis**

 

**2008**

 

1

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# **Caution regarding forward-lookingstatements**

# ** **

*This documentand Management’s discussion and analysis contain forward-looking statementsabout expected future events and financial and operating results of TELUSCorporation (TELUS or the Company, and where the context of the narrativepermits, or requires, its subsidiaries). By their nature, forward-lookingstatements require the Company to make assumptions, and forward-lookingstatements are subject to inherent risks and uncertainties. There issignificant risk that assumptions (see Section 1.5**Financialand operating targets for 2009), predictions and other forward-lookingstatements will not prove to be accurate. Readers are cautioned not to placeundue reliance on forward-looking statements as a number of factors could causeactual future results, conditions, actions or events to differ materially fromthe targets, expectations, estimates or intentions expressed. Except asrequired by law, the Company disclaims any intention or obligation to update orrevise any forward-looking statements, and reserves the right to change, at anytime at its sole discretion, its current practice of updating annual targetsand guidance. Targets for 2009 and assumptions are described in Section 1.5.*

 

*Factors that could cause actual results to differ materially include,but are not limited to:*

 

*Competition (including more active price competition and the likelihoodof new wireless competitors beginning to offer services in late 2009 and into2010 as a result of the 2008 advanced wireless services (AWS) spectrumauction); economic growth and fluctuations (including the global credit crisis,and pension performance, funding and expenses); capital expenditure levels(increasing in 2009 and potentially in future years due to the Company’s fourthgeneration (4G) wireless deployment strategy and any new Industry Canadawireless spectrum auctions); financing and debt requirements (including abilityto carry out refinancing activities and fund share repurchases); tax matters(including acceleration or deferral of required payments of significant amountsof cash taxes); human resource developments; business integrations and internalreorganizations (including ability to successfully implement cost reductioninitiatives)**;**technology (including reliance on systems and informationtechnology, broadband and wireless technology options, choice of suppliers andsuppliers’ ability to maintain and service their product lines, expectedtechnology and evolution path and transition to 4G technology, expected futurebenefits and performance of high-speed packet access (HSPA) / long-termevolution (LTE) wireless technology, successful implementation of the networkbuild and sharing arrangement with Bell Canada to achieve cost efficiencies**andreduce deployment risks, successful deployment and operation of new wirelessnetworks and successful introduction of new products, services and supportingsystems); regulatory approvals and developments (including interpretation andapplication of tower sharing and roaming**rules, thedesign and impact of future spectrum auctions, the review of new media and Internet trafficmanagement practices, and possible changes to foreign ownership restrictions);process risks (including conversion of legacy systems and billing systemintegrations, and implementation of large complex deals); health, safety andenvironmental developments; litigation and legal matters; business continuityevents (including manmade and natural threats); any prospectiveacquisitions or divestitures; andother risk factors discussed herein and listed from time to time in TELUS’reports and public disclosure documents including its annual report, annualinformation form, and other filings with securities commissions in Canada (onsedar.com) and in its filings in the United States, including Form 40-F(on EDGAR at sec.gov).*

 

*For further information, see*Section 10: Risks and risk management*in Management’s discussion and analysis.*

 

# **Management’s discussion and analysis**

February 11, 2009

 

Thefollowing is a discussion of the consolidated financial position and results ofoperations of TELUS Corporation for the years ended December 31, 2008and 2007, and should be read together with TELUS’ audited Consolidatedfinancial statements. This discussion contains forward-looking information thatis qualified by reference to, and should be read together with, the *Caution regarding forward-looking statements* above.

 

TELUS’Consolidated financial statements have been prepared in accordance withCanadian generally accepted accounting principles (GAAP), which differ incertain respects from U.S. GAAP. See Note 22 to the Consolidated financialstatements for a summary of the principal differences between Canadian and U.S.GAAP as they relate to TELUS. The Consolidated financial statements andManagement’s discussion and analysis were reviewed by TELUS’ Audit Committeeand approved by TELUS’ Board of Directors. All amounts are in Canadian dollarsunless otherwise specified.

 

TELUShas issued guidance on and reports on certain non-GAAP measures used bymanagement to evaluate performance of business units, segments and the Company.Non-GAAP measures are also used to determine compliance with debt covenants andmanage the capital structure. Because non-GAAP measures do not have astandardized meaning, securities regulations require that non-GAAP measures beclearly defined and qualified, and reconciled with their nearest GAAP measure.For the reader’s reference, the definition, calculation and reconciliation ofconsolidated non-GAAP measures are provided in *Section 11:Reconciliation of non-GAAP measures and definition of key operating indicators*.

 

2

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**Management’sdiscussion and analysis contents**

 
| **Section** | ** **                                                                      | **Page** | ** ** | **Contents** | ** **                                                                                                                                                 |
|-------------|---------------------------------------------------------------------------------|----------|------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.          | Introduction, performance summary and targets                                   |     | 3          |         | A summary of TELUS’ consolidated results for  2008, performance against 2008 targets, and presentation of targets for 2009                            |   |
| 2.          | Core business, vision and strategy                                              |     | 13         |         | A discussion of TELUS’ core business, vision and  strategy, including examples of TELUS’ activities in support of its six  strategic imperatives |   |
| 3.          | Key performance drivers                                                         |     | 16         |         | A report on 2008 corporate priorities and an  outline of 2009 priorities                                                                                   |   |
| 4.          | Capabilities                                                                    |     | 18         |         | A description of the factors that affect the  capability to execute strategies, manage key performance drivers and deliver  results                        |   |
| 5.          | Results from operations                                                         |     | 24         |         | A detailed discussion of operating results for  2008                                                                                                       |   |
| 6.          | Changes in financial position                                                   |     | 36         |         | A discussion of changes in the consolidated  statements of financial position for the year ended December 31, 2008                                    |   |
| 7.          | Liquidity and capital resources                                                 |     | 38         |         | A discussion of cash flow, liquidity, credit  facilities and other disclosures                                                                             |   |
| 8.          | Critical accounting estimates and accounting  policy developments               |     | 49         |         | A description of accounting estimates that are  critical to determining financial results, and changes to accounting policies                              |   |
| 9.          | General outlook                                                                 |     | 55         |         | The outlook for the telecommunications business  in 2009                                                                                                   |   |
| 10.         | Risks and risk management                                                       |     | 59         |         | Risks and uncertainties facing TELUS and how the  Company manages these risks                                                                              |   |
| 11.         | Reconciliation  of non-GAAP measures and definition of key operating indicators |     | 80         |         | A description,  calculation and reconciliation of certain measures used by management                                                                      |   |

## ** **

## **1.**              Introduction, performance summaryand targets

## ** **

The following discussion is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, and *Section 10: Risks and risk management*.

 

### **1.1Materiality for disclosures**

### ** **

Managementdetermines whether or not information is material based on whether it believesa reasonable investor’s decision to buy, sell or hold securities in the Companywould likely be influenced or changed if the information were omitted ormisstated.

 

### **1.2Canadian economy and telecommunications industry**

### ** **

Economic and telecom industry growth

 

In early 2009, economicuncertainty related to the tightening of credit markets worldwide remains. Thecredit situation remains fluid and it is difficult to predict future outcomes.TELUS’ capital structure financial policies, which are discussed under *Capabilities — Section 4.3 Liquidity and capital resources*,were designed with credit cycles in mind. The Company believes that thesefinancial policies and guidelines, and maintaining credit ratings in the rangeof BBB+ to A-, or the equivalent, provide reasonable access to capital markets.

 

The Government of Canada, in its January 2009 public budgetdocuments, noted there was a broad-based consensus that the Canadian economyentered into recession in the fourth quarter of 2008, and that private sectorforecasters expected the recession to last three quarters. The economicweakness and stock market decline that began in 2008 are expected to increaseTELUS’ net defined benefit pension plans expense and funding in 2009, asreflected in the Company’s public targets for 2009. See *Section 1.5Financial and operating targets for 2009*.

 

The Company estimates that revenues for the Canadian telecom industrygrew by approximately 4.4% in 2008, due to continued wireless growth, whichmore than offset the declines of a mature wireline segment. TELUS’ 2008revenues increased by 6.4% to $9.65 billion due to wireless growth andwireline data revenue growth assisted by acquisitions completed in January.

 

Key industry development

 

In December 2008, the pending sale ofCanada’s largest incumbent telecommunications company BCE (Bell Canada) wasterminated due to its failure to satisfy a solvency condition. BCE is takingaction to attempt to recover a $1.2 billion deal break fee from theacquiring consortium led by Teachers Private Capital, the private investmentarm of the Ontario Teachers’ Pension Plan. BCE in mid-2008 had a change in ChiefExecutive Officer (CEO) embarked on a reorganization and efficiency program, 

 

3

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and changed its branding. On the collapse ofthe acquisition, dividend payments were resumed and a modest share repurchaseprogram was announced. Had the proposed acquisition been completed, BCE wasexpected to be highly levered with debt and extremely focused on maximizing short-termcash flow. With less leverage, BCE is expected to remain a strong competitor toTELUS and other communications companies in Canada.

 

Wireless developments

 

TELUS estimates that Canadian wireless revenues grew by 11% in 2008 asmarket penetration for the industry increased by an estimated 4.6 percentagepoints to approximately 65% of the population. The expectation for 2009 is anapproximate 4.5 percentage point gain in the proportion of the population usingwireless services, which are less likely than many other consumer expendituresto be eliminated in an economic downturn.

 

In 2008, TELUS’ wireless segment achieved 9% revenue growth (including55% data revenue growth) and 10% subscriber growth. The Company’s Mike® servicehas exposure to the transport, construction, automotive and oil and gassectors, which have been particularly affected by the economic downturn,resulting in a weakening in Mike service average revenue per subscriber unit(ARPU). Overall wireless ARPU decreased by 2% in the fourth quarter and 1% forthe full year of 2008 when compared to 2007. The economic downturn is expectedto place continued downward pressure on wireless ARPU for the Company’sexisting subscriber base and new subscriber additions, as well as on voiceroaming revenues, as compared to results achievable in non-recessionary times.

 

As in recent years, a key driver of wireless growth continues to be theincreased smartphone adoption and usage of data services such as text messagingand mobile computing. Canadian wireless providers continue the roll-out offaster next generation high-speed wireless networks to capture this growthopportunity. In 2008, TELUS announced its wireless technology evolutionstrategy toward fourth generation (4G) LTE, including the current joint HSPAnetwork build and expected service launch by early 2010. See *Section 2.2 Vision and strategy - Building national capabilities*.

 

Competition remains intense due to a number of factors includingintroduction of TELUS’ basic brand and service (Koodo Mobile®) in March 2008;the presence of mobile virtual network operators (MVNOs) such as Virgin Mobileand Videotron Ltd.; and discount brand offerings by Bell (Solo) and Rogers(Fido). Wireless number portability first introduced in March 2007facilitates customers moving to a different provider while retaining theirexisting phone number. Competition is expected to increase in future years as aresult of new entrants acquiring spectrum in the 2008 advanced wirelessservices (AWS) spectrum auction.

 

AWS and other spectrum auction in the 2 GHzrange

 

Industry Canada conducted awireless spectrum licence auction between May 27 and July 21, 2008for 90 MHz of AWS spectrum (including 40 MHz set aside for newentrants), 10 MHz for personalcommunications network (PCS) service extension, and 5 MHz for another small band.The auction concluded after 331 rounds with Industry Canada reporting totalproceeds of $4,255 million (average of $1.55/MHz/POP for AWS and PCSspectrum, where POP refers to one person in a population area). Proceeds fromthe auction were up to three times more than original expectations before theauction began.

 

TELUS was the successful bidderon 59 spectrum licences, providing additional spectrum depth nationally inmarkets TELUS already covers. Of the 59 licences acquired, 32 were 20 MHzlicences covering geographic areas of Quebec, Southwestern Ontario, OttawaRegion, Manitoba, Saskatchewan, Alberta and B.C., while 27 were 10 MHzlicences covering Toronto, Central and Northern Ontario, Yukon, NorthwestTerritories and Nunavut, Newfoundland and Labrador, Nova Scotia, New Brunswick,and P.E.I. The average spectrum acquired in the AWS auction by TELUS was16.2 MHz at a cost of $1.82/MHz/POP.

 

TELUS paid Industry Canada$882 million for the licences andrelated auction charges in the third quarter, through a combination of drawing on its creditfacilities and utilization of cash on hand. Each of the successful spectrumbidders was required to demonstrate compliance with Canadian ownershiprequirements and other licence conditions. TELUS received its ownershipcompliance decision from Industry Canada effective December 2008. For additional discussion, see *Section 2.2**Vision and strategy —**Buildingnational capabilities*  and *Section 10.3Regulatory**.*

 

Wireless competition is expectedto increase in the future as a result of several entrants acquiring regionalspectrum in the AWS spectrum auction, as summarized below. Subject to meetingIndustry Canada’s eligibility requirements, some entrants are expected to beginoffering services in late 2009 and in 2010, as they establish operations, andbuild wireless networks in areas where they have acquired spectrum.

 

4

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**Existing and potentialcompetitors acquiring licences in the 2008 Industry Canada spectrum auction**

 
| **Competitor**                                     | ** ** | **Primary geographic focus**                                                             |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                               |       |                                                                                               |
| Incumbent national facilities-based  competitors   |       |                                                                                               |
|                                               |       |                                                                                               |
| Rogers  Communications Inc.                        |       | Expansion of existing national capacity                                                            |
| Bell Mobility Inc.  (Bell Canada)                  |       | Expansion of existing national capacity                                                            |
| TELUS                                              |       | Expansion of existing national capacity for  future LTE technology deployment                      |
|                                               |       |                                                                                               |
| Incumbent provincial facilities-based  competitors |       |                                                                                               |
|                                               |       |                                                                                               |
| MTS Allstream                                      |       | Expansion of existing Manitoba capacity                                                            |
| SaskTel                                            |       | Expansion of existing Saskatchewan capacity                                                        |
|                                               |       |                                                                                               |
| Entrants******(1)**                                |       |                                                                                               |
|                                               |       |                                                                                               |
| Globalive Wireless  LP                             |       | Spectrum in most regions, but excluding most  of Quebec                                            |
| Data &  Audio-Visual Enterprises          |       | Spectrum in most major centres outside of  Saskatchewan, Manitoba, Quebec and Atlantic Canada      |
| BMV Holdings  (6934579 Canada Inc.)                |       | Spectrum in Southern and Eastern Ontario and  Southern and Eastern Quebec                          |
| Québecor Inc.  (9193-2962 Québec Inc.)   |       | Regional spectrum in Quebec and parts of  Ontario, including Toronto                               |
| Shaw Communications  Inc.                          |       | Regional spectrum in Western Canada and  Northern Ontario                                          |
| Bragg Communications  Inc.                         |       | Regional spectrum in Atlantic Canada and  Southwestern Ontario, as well as Grande Prairie, Alberta |
| Novus Wireless Inc.                                |       | Provincial spectrum in B.C. and Alberta                                                            |
| Blue Canada Wireless  Inc.                         |       | Provincial spectrum in Nova Scotia and P.E.I.                                                      |
| Others                                             |       | Three local areas in total                                                                         |

 

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(1) Subjectto building a wireless network in the geographic areas where they elect tocompete.

 

Wireline developments

 

As in 2007, the industry is continuing to focus its attention onbroadband services to moderate the losses in network access lines. Aspenetration in this area approaches a saturation point, telecom and cable-TVcompanies have started to compete on speed, applications and price to differentiatetheir product offerings. Internet protocol (IP) telephony has facilitated agrowing revenue stream for cable-TV companies. Telecom companies arestrategically positioning themselves to encroach into the TV entertainmentmarket with existing satellite TV service and/or new IP TV offerings. Consumerscontinue to substitute wireless and voice over IP (VoIP) services fortraditional wired telephony services. Competitive losses and substitution haveresulted in certain North American telecom companies having residential accessline losses around 12%. At December 31, 2008, TELUS’ estimated wirelineshare of the local residential telephony market in B.C. and Alberta was 66%.Approximately 12% of households in B.C. and Alberta have only wirelesstelephone service amongst all providers, including TELUS.

 

The Company operates its incumbent wireline business in B.C., Albertaand Eastern Quebec, which have been less exposed to the manufacturing downturnin Central Canada, but recently exposed to certain cyclical commodity sectors,such as oil and lumber. The Company’s national business growth strategy isfocused on four vertical markets that do not include manufacturing and TELUScontinues to see growth in the public and healthcare sectors in particular.

 

TELUS’ wireline segment external revenues increased 4% in 2008. Growthfrom wireline data services, including data revenues from two acquisitions,more than offset losses in voice services. While business network access linesincreased by 2% in both 2008 and 2007 from the Company’s focus on non-incumbentgrowth, TELUS’ residential access lines decreased by 7.5% in 2008 and 6.5% in2007, due to continued strong competition particularly from cable telephony andtechnological substitution.

 

Building capability in business markets

 

TELUS’ approach to the business market is through growth in CentralCanada as well as nationally, with a focus on key vertical markets, includingthe public sector, healthcare, financial services and energy. In 2008, TELUSadvanced its capabilities in the healthcare and financial services sectors withthe January 2008 acquisition of Emergis Inc., a business processoutsourcer specializing in these areas. TELUS has become a national leader inthe provision of advanced data solutions to the healthcare sector. See *Section 2.2 Vision and strategy — Partnering, acquiring anddivesting.*

 

TELUS continues to expand its broad suite of call centre and businessprocess outsourcing services for the benefit of a**largeroster of Canadian, U.S. and international clients, as well as for internalrequirements. These services are reliant on TELUS’ growing call centreoperations at various locations around the world including the Philippines.More recently, bilingual Spanish and English language capabilities have been expandedby acquiring a minority investment in a company with call centre operations inthree 

 

5

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Central American countries, and soon at a new TELUS call centre beingopened in Clark County, Nevada. This geographic expansion and augmentedbilingual Spanish-English language support improves the Company’s competitiveoffering for this growing line of business.

 

### **1.3Consolidated highlights**

### ** **

The Chief Executive Officer, whois the chief operating decision-maker, regularly received TELUS’ 2008 and 2007consolidated reports on two bases: including and excluding (labelled *as adjusted*) an incremental charge for introducing anet-cash settlement feature for share option awards granted prior to 2005. Thenet-cash settlement feature was introduced in the first quarter of 2007. Thehighlights table below presents the unadjusted and adjusted views.

 
| **Consolidated highlights  ($ millions, except per share amounts,** | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **subscribers and ratios)**                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
| **Consolidated  statements of income**                                                            |       |                                       |       |   |   |   |   |
|                                                                                              | ** ** | ** **                                 |       |   |   |   |   |
| Operating  revenues                                                                               | ** ** | **9,653**                                  |       | 9,074 |   | 6.4 | % |
|                                                                                              |       |                                       |       |   |   |   |   |
| Operating  income                                                                                 | ** ** | **2,066**                                  |       | 1,974 |   | 4.7 | % |
| Net-cash  settlement feature expense                                                              | ** ** | **—**                                 |       | 169 |   | (100 | )% |
| Operating  income (as adjusted)                                                                   | ** ** | **2,066**                                  |       | 2,143 |   | (3.6 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| Income  before income taxes                                                                       | ** ** | **1,567**                                  |       | 1,498 |   | 4.6 | % |
| Net-cash  settlement feature expense                                                              | ** ** | **—**                                 |       | 169 |   | (100 | )% |
| Income  before income taxes (as adjusted)                                                         | ** ** | **1,567**                                  |       | 1,667 |   | (6.0 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| Net income                                                                                        | ** ** | **1,128**                                  |       | 1,258 |   | (10 | )% |
| Net-cash  settlement feature expense, after tax                                                   | ** ** | **—**                                 |       | 105 |   | (100 | )% |
| Net income  (as adjusted)                                                                         | ** ** | **1,128**                                  |       | 1,363 |   | (17 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| Earnings per  share (EPS), basic ($)                                                              | ** ** | **3.52**                                   |       | 3.79 |   | (7.1 | )% |
| Net-cash  settlement feature expense per share                                                    | ** ** | **—**                                 |       | 0.32 |   | (100 | )% |
| Earnings per  share, basic (as adjusted) ($)                                                      | ** ** | **3.52**                                   |       | 4.11 |   | (14 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| Earnings per  share, diluted ($)                                                                  | ** ** | **3.51**                                   |       | 3.76 |   | (6.6 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| Cash  dividends declared per share ($)                                                            | ** ** | **1.825**                                  |       | 1.575 |   | 16 | % |
|                                                                                              |       |                                       |       |   |   |   |   |
| **Consolidated  statements of cash flows**                                                        |       |                                       |       |   |   |   |   |
|                                                                                              | ** ** | ** **                                 |       |   |   |   |   |
| Cash  provided by operating activities                                                            | ** ** | **2,819**                                  |       | 3,172 |   | (11 | )% |
| Cash used by  investing activities                                                                | ** ** | **3,433**                                  |       | 1,772 |   | 94 | % |
| Capital  expenditures                                                                             | ** ** | **1,859**                                  |       | 1,770 |   | 5.0 | % |
| Payment for  advanced wireless spectrum licences                                                  | ** ** | **882**                                    |       | — |   | n.m. |   |
| Acquisitions                                                                                      | ** ** | **696**                                    |       | — |   | n.m. |   |
| Cash  provided (used) by financing activities                                                     | ** ** | **598**                                    |       | (1,369 | ) | n.m. |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| **Subscribers  and other measures**                                                               |       |                                       |       |   |   |   |   |
|                                                                                              | ** ** | ** **                                 |       |   |   |   |   |
| Subscriber  connections (1) (thousands)                                                      | ** ** | **11,595**                                 |       | 11,147 |   | 4.0 | % |
|                                                                                              |       |                                       |       |   |   |   |   |
| EBITDA (2)                                                                                        | ** ** | **3,779**                                  |       | 3,589 |   | 5.3 | % |
| Net-cash  settlement feature expense                                                              | ** ** | **—**                                 |       | 169 |   | (100 | )% |
| EBITDA (as  adjusted)                                                                             | ** ** | **3,779**                                  |       | 3,758 |   | 0.6 | % |
|                                                                                              |       |                                       |       |   |   |   |   |
| Free cash  flow (3)                                                                               | ** ** | **567**                                    |       | 1,573 |   | (64 | )% |
|                                                                                              |       |                                       |       |   |   |   |   |
| **Debt and  payout ratios****(4)**                                                                |       |                                       |       |   |   |   |   |
|                                                                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net debt to  EBITDA — excluding restructuring costs                                          | ** ** | **1.9**                                    |       | 1.7 |   | 0.2 |   |
| Dividend  payout ratio (5) (%)                                                               | ** ** | **56**                                     |       | 54 |   | 2 | pts |

 

----

n.m.— not meaningful; pts — percentage points

(1)             The sum of wireless subscribers, network access lines and Internetaccess subscribers measured at the end of the respective periods based oninformation in billing and other systems. The measure excludes TELUS TV®subscriber connections.

(2)             EBITDA is anon-GAAP measure. See *Section 11.1 Earningsbefore interest, taxes, depreciation and amortization (EBITDA).*

(3)             Based ondefined benefits plans net recovery and including the $882 million payment forAWS spectrum licences in 2008. See *Section 11.2 Freecash flow.*

(4)             See *Section 7.4 Liquidity and capital resource measures* and*Section 11.4 Definitions of liquidity andcapital resource measures.*

(5)             Based onearnings per share excluding favourable tax-related adjustments and net-cashsettlement feature expense.

 

6

----

 

**Highlightsfrom operations:**

** **

·                  The Company met two of fouroriginal consolidated targets, and met three of the four original segmentedtargets for 2008. See *Section 1.4Performance scorecard for 2008 results*.

 

·                  Subscriber connections reportedexclude TELUS TV subscribers. Connections increased by 448,000 during 2008, netof approximately 28,000 subscriber deactivations resulting from turning downthe analog wireless network in September. The number of wireless subscribersgrew by 10% to 6.13 million, the number of Internet subscribers grew by3.8% to 1.22 million and the number of network access lines decreased by3.6% to 4.25 million. Excluding the analog wireless subscriberdeactivations, subscriber connections increased by approximately 476,000.

 

·                  The Company’s wireless grosssubscriber additions for 2008 set TELUS fourth quarter and full year records,and were positively influenced by the introduction of the newpostpaid basic service and brand Koodo Mobile in March 2008. Wireless ARPU was $62.73 in 2008,down 1% from 2007, reflecting price competition in voice services, offset bystrong data ARPU growth.

 

·                  Operating revenues increased by$579 million in 2008 when compared to 2007, due primarily to growth inwireless network revenues and wireline data revenues, which more than offsetrevenue declines in wireline voice local and long distance. Growth in wirelinedata revenues included revenues from two acquisitions, Emergis Inc. and, to amuch lesser extent, Fastvibe, completed in January 2008.

 

·                  Operating income adjusted to excludethe net-cash settlement feature decreased by $77 million in 2008, whencompared to 2007. The decrease was primarily due to additional softwareamortization from the January acquisition of Emergis and implementation ofa new phase of the converged wireline billing and client care platform in July 2008,as well as a 2.1% increase in depreciation, partially offset by slightly higherEBITDA (as adjusted). EBITDA (as adjusted) increased by $21 million forthe full year when compared to 2007, as increased data revenues were partlyoffset by costs supporting the growth, including costs of acquisitionsupporting strong wireless subscriber additions and upfront implementationcosts for new wireline enterprise customers.

 

·                  Income before income taxes (asadjusted) decreased by $100 million in 2008 when compared to 2007. Thedecrease was due to lower operating income (as adjusted) and higher netfinancing costs. Net financing costs include increased interest expenses mainlyfrom debt added in 2008 to help fund acquisitions in January and paymentfor AWS spectrum licences in the third quarter. Net financing costs alsoinclude interest income, which decreased significantly in 2008, due to loweramounts of interest on tax refunds and cash and temporary investments.

 

·                  Net income decreased by$130 million or 27 cents per share (basic) in 2008 when compared to2007. The decrease included lower net income tax recoveries and relatedinterest of $208 million (63 cents per share). Net income before incometax-related adjustments increased by $78 million or 36 cents per share.Average shares outstanding in 2008 were 3.4% lower than in 2007, due to marketrepurchases under normal course issuer bid (NCIB) programs.

 
| **Net income changes********($ millions)**                         | ** ** | **Years ended  December 31** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
|                                                                              |       |                                   |       |
| Net income  in 2007                                                               |       | 1,258                                  |       |
| Deduct  favourable income tax-related adjustments in 2007 (see*Section 5.2)* |       | (257                                   | )          |
|                                                                              |       | 1,001                                  |       |
| Tax-effected  changes:                                                            |       |                                   |       |
| Lower  net-cash settlement feature expense                                        |       | 105                                    |       |
| Higher  EBITDA as adjusted (1)                                                    |       | 14                                     |       |
| Higher  depreciation and amortization (1), excluding investment tax credits       |       | (69                                    | )          |
| Interest  expenses (1)                                                            |       | 2                                      |       |
| Other                                                                             |       | 26                                     |       |
|                                                                              |       | 1,079                                  |       |
| Favourable  income tax-related adjustments in 2008 (see *Section 5.2)*       |       | 49                                     |       |
| **Net  income in 2008**                                                           | ** ** | **1,128**                              | ** ** |

 

----

(1) Forthe purposes of this presentation, the 2008 blended statutory tax rate wasused.

 

Highlights — liquidity andcapital resources:

 

·                  At December 31, 2008, TELUS hadunutilized credit facilities of $1.15 billion, as well as unutilizedavailability under its accounts receivable securitization program, consistentwith its objective of generally maintaining more than $1 billion ofunutilized liquidity. In addition, the Company continues to meet the two otherkey guidelines. Net debt to EBITDA at December 31, 2008 was1.9 times, within the Company’s long-term target policy range of 1.5 to2.0 times. The dividend payout ratio, based on the annualized fourth quarterdividend and earnings for 2008 (excluding favourable income tax-relatedadjustments), was 56%, slightly above the Company’s prospective guideline of45% to 55% of 

 

7

----

 

sustainablenet earnings. In December, the Company renewed its $700 million, 364-daycredit facility with a syndicate of Canadian banks, extending the term to March 1,2010.

 

·                  The Company renewed its NCIB programfor another year. Under Program 5, which will expire on December 23,2009, the maximum number of TELUSshares that may be purchased is eight million, or 2.5% of the sharesoutstanding at December 31, 2008. See *Section 7.3 Cashused by financing activities.*

 

·                  Cash provided by operatingactivities decreased by $353 million in 2008 when compared to 2007,primarily due to lower recoveries of income taxes and related interest. Inaddition, proceeds from securitized accounts receivable were reduced by$200 million in 2008 (as compared to no change for 2007).

 

·                  Cash used by investing activitiesincreased by $1,661 million in 2008 when compared to 2007, due to paymentof $882 million for AWS licences, the January 2008 acquisition ofEmergis for $692 million (net of acquired cash) and higher capitalexpenditures. The increase in capital expenditures in 2008 was directed toinvestments supporting high bandwidth services for business and residentialcustomers, the next generation wireless HSPA network, healthcare and financialservices solutions and upfront expenditures to support new enterprisecustomers.

 

**·**                  Net cash provided by financing activities was $598 million in 2008.This compares to net cash used by financing activities of $1,369 millionin 2007. Net cash provided by financing activities in 2008 included higher utilizationof the 2012 bank facility and the April 2008 issue of $500 millionNotes maturing in 2015, partly offset by a reduction in issued commercialpaper, which helped support payment of $882 million for AWS spectrumlicences in the third quarter and $692 million for January acquisitions,net of acquired cash. In addition, fewer shares were repurchased under NCIBprograms and the dividend for the fourth quarter of 2008 was remitted on the January 2,2009 payment date (while the dividend for the fourth quarter of 2007 wasremitted on December 31, 2007 for the January 1, 2008 payment date).Net cash used by financing activities in 2007 included the June repaymentof $1.5 billion of matured Notes.

** **

**·**                  The dividend declared in the fourth quarter of 2008 increased by 5.6% to47.5 cents per Common Share and Non-Voting Share, up from 45 cents pershare declared in each of the four preceding quarters. This is the fifthconsecutive annual increase in the quarterly dividend rate.

** **

**·**                  Free cash flow decreased by $1,006 million in 2008 when compared to2007, due mainly to the $882 million payment for AWS spectrum licences in2008 and increased capital expenditures, as well as receipt of larger incometax recoveries and related interest in 2007. Financing activities in 2008supplemented free cash flow to help fund January acquisitions and thepurchase of AWS spectrum licences.

** **

### **1.4 Performancescorecard**

### ** **

Fiveof the eight original consolidated and segmented targets for 2008 were met,while three were not achieved. Targets for consolidated revenue, wirelinerevenue and EBITDA, and wireless revenue were achieved. Consolidated andwireless EBITDA fell below their respective target ranges due to severalfactors, including lower wireless ARPU, higher subscriber acquisition and retentionexpenses and costs associated with data growth. Earnings per share fell withinthe target range only as a result of favourable income tax recoveries; hence,the 2008 EPS target was not achieved. The consolidated capital expenditurestarget was achieved with actual expenditures 2% below the $1.9 billiontarget.

 

Duringthe year, management provided revised annual 2008 guidance and assumptions whenthe results for the second and third quarters were announced. Annual guidancerevisions for 2008 were also provided for revenues and capital expenditures inthe 2009 targets news release and investor call on December 16, 2008.Actual results met the eight metrics from the final guidance, except forcapital expenditures.

 

Inthe following scorecard, TELUS’ results for 2008 are compared to its originaltargets. Targets for 2009 are also presented and are fully qualified by the *Caution regarding forward-looking statements* at thebeginning of Management’s discussion and analysis and *Section 10:Risks and risk management*. Additional information on expectationsand assumptions for 2009 may be found in *Section 1.5 Financialand operating targets for 2009*, *Section 1.6 TELUSsegments at a glance* and *Section 9: Generaloutlook*.

 

8

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| **Scorecards**                                                                                                                                     | ** ** | **Performance for 2008** | ** ** | **2009 targets**      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| **Legend******ü**       Met target********X        Missed target** | ** ** | **Actual results**            | ** ** | **Change  from 2007** | ** ** | **Original 2008  targets** | ** ** | **Target  result** | ** ** | **Targets** | ** ** | **Change from  2008 actual  results** | ** ** |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| **Consolidated**                                                                                                                                   | ** ** | ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                                                                                           | ** ** | **$9.653 billion**                 |       | 6.4%                       |       | $9.6 to  $9.8 billion |   | ü | ** ** | **$10.025 to  $10.275 billion** |   | 4 to 6% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| EBITDA (1) (2)                                                                                                                                | ** ** | **$3.779 billion**                 |       | 0.6%                       |       | $3.8 to  $3.95 billion |   | X | ** ** | **$3.75 to  $3.9 billion** |   | (1) to 3% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| EPS — basic (3)                                                                                                                               | ** ** | **$3.52**                          |       | (14)%                      |       | $3.50 to  $3.80 |   | — | ** ** | **$3.40 to $3.70** |   | (3) to 5% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| EPS — basic, (3) (excluding income tax-related adjustments) (4)                                                                          | ** ** | **$3.37**                          |       | 1.2%                       |       | $3.50 to  $3.80 |   | X | ** ** | **$3.40 to $3.70** |   | 1 to 10% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| Capital expenditures (excluding expenditures for AWS spectrum licences  in 2008)(5)                                                                | ** ** | **$1.859 billion**                 |       | 5.0%                       |       | Approx.  $1.9 billion |   | ü | ** ** | **Approx.  $2.05 billion** |   | 10% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| **Wireline  segment**                                                                                                                              | ** ** | ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue (external)                                                                                                                                 | ** ** | **$5.021 billion**                 |       | 4.4%                       |       | $4.975 to  $5.075 billion |   | ü | ** ** | **$5.05 to  $5.175 billion** |   | 0 to 3% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| EBITDA (2)                                                                                                                                         | ** ** | **$1.774 billion**                 |       | (3.0)%                     |       | $1.725 to  $1.8 billion |   | ü | ** ** | **$1.65 to  $1.725 billion** |   | (3) to (7)% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| **Wireless  segment**                                                                                                                              | ** ** | ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue (external)                                                                                                                                 | ** ** | **$4.632 billion**                 |       | 8.6%                       |       | $4.625 to  $4.725 billion |   | ü | ** ** | **$4.975 to  $5.1 billion** |   | 7 to 10% |   |
|                                                                                                                                               |       |                               |       |                       |       |   |   |   |   |   |   |   |   |
| EBITDA (2)                                                                                                                                         | ** ** | **$2.005 billion**                 |       | 3.9%                       |       | $2.075 to  $2.15 billion |   | X | ** ** | **$2.1 to  $2.175 billion** |   | 5 to 8% |   |

 

----

(1)           See *Section 11.1 Earnings before interest, taxes, depreciation andamortization (EBITDA)* for the definition.

(2)           Forcomparative purposes, EBITDA for 2007 was adjusted to exclude an incrementalpre-tax charge that related to the introduction of a net-cash settlementfeature for share option awards granted prior to 2005. Of the $169 millioncharge, approximately $145 million was recorded in wireline and$24 million was recorded in wireless.

(3)           For comparativepurposes, basic EPS for 2007 was adjusted to exclude an incremental after-taxcharge of $0.32 per share for the introduction of a net-cash settlementfeature.

(4)           A non-GAAPmeasure.

(5)           The targetfor 2008 capital expenditures was set excluding expenditures in the AWSspectrum auction held from May to July 2008.

 

Thefollowing key assumptions were made at the time the 2008 targets were announcedin December 2007.

 
| **Assumptions for 2008 targets**                                                                       | ** ** | **Actual or estimated result for 2008**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |       | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Canadian real GDP growth estimate  of 2.8% and above average growth in the provinces of Alberta and B.C.              |       | Growing economic uncertainty in  2008 resulted in the Conference Board of Canada, Canadian banks and others  reducing forecasts several times. Real GDP growth rates for 2008 are  estimated to be less than one per cent for Canada with above average growth  for B.C. and Alberta. These estimates were aggregated from recent reports  from the Bank of Canada and several Canadian banks.                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Canadian dollar at or near parity  with the U.S. dollar                                                               |       | The Canadian dollar closed at  U.S. $0.821 on December 31, 2008, after averaging U.S. $0.94 for the  full year, based on daily closing rates. Influenced by declining commodity  prices and growing economic uncertainty, the Canadian dollar averaged U.S.  $0.825 in the fourth quarter of 2008, down from an average U.S. $0.98 for the  first nine months. (Source: the Bank of Canada.)

 

TELUS maintained its position of  fully hedging foreign exchange exposure for the 8.00% U.S. dollar Notes due  2011. The Company’s foreign exchange risk management also includes the use of  foreign currency forward contracts and currency options to fix the exchange  rates on short-term U.S. dollar transactions and commitments |
|                                                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Increased wireline competition in  both business and consumer markets, particularly from cable-TV and VoIP  companies |       | Confirmed by: (i) a western  cable-TV competitor reporting strong high-speed Internet and telephone net  additions and expansion of its product offerings to appeal to a wider consumer  and small and medium-sized business base in more locations; and  (ii) TELUS’ network access line losses of 3.6% in 2008                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| The impact of the acquisition of  Emergis to begin in March 2008                                                 |       | The transaction closed in  mid-January 2008 and had only a minor impact on TELUS’ 2008 targets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

9

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| **Assumptions for 2008 targets**                                                                                                  | ** ** | **Actual or estimated result for 2008**                                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| Canadian wireless industry market  penetration gain of 4.5 to five percentage points for the year                                                |       | Wireless market penetration gain  of 4.6%, down slightly as compared to 2007                                                                                                                                                 |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| Capital expenditures target set  excluding potential purchases of wireless spectrum in the AWS spectrum  auction                                 |       | Actual results were as noted  above. Payments of $882 million for AWS spectrum licences were recorded  in the third quarter                                                                                             |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| No new wireless competitive  entrant assumed for 2008                                                                                            |       | Correct assumption. Eight  regional competitive entrants acquired spectrum licences in the AWS auction  concluded July 2008, but it is expected that entrants are not likely to  offer services until late 2009 or 2010 |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| Restructuring expenses of  approximately $50 million including the integration of Emergis                                                   |       | Actual result of $59 million  for the full year supported efforts aimed at improving cost structures and  enhancing efficiency that gained traction towards the end of the year                                         |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| A blended statutory income tax  rate of 31 to 32%                                                                                      |       | The blended statutory rate was  31% as a result of enacted British Columbia tax rate changes                                                                                                                                 |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| A discount rate of 5.5% (50 basis  points higher than 2007) and expected long-term return of 7.25% for pension  accounting (unchanged from 2007) |       | Pension accounting assumptions  are set at the beginning of the year. See *Section 1.5*  for the 2009 assumptions                                                                                                       |
|                                                                                                                                             |       |                                                                                                                                                                                                                         |
| Average shares outstanding of  approximately 320 million                                                                                    |       | Average shares outstanding for  2008 were 320 million, 3.4% lower than in 2007.                                                                                                                                         |

### ** **

### **1.5 Financial andoperating targets for 2009**

### ** **

The following discussion isqualified in its entirety by the *Caution regarding forward-lookingstatements* at the beginning of Management’s discussion and analysis,as well as *Section 10: Risks and risk management*.The following assumptions apply to TELUS’ 2009 targets shown in the table inthe previous section. The 2009 targets and assumptions were originallyannounced on December 16, 2008.

 

For 2009, TELUSis targeting 4 to 6% consolidated revenue growth, an increase of$372 to $622 million. EBITDA growth is expected to be in a rangeof up to 3%, moderated by an increased pension expense in 2009 due to equitymarket weakness in 2008. Restructuring costs in 2009 have been estimatedbetween $50 million and $75 million. EPS is targeted to be $3.40 to$3.70, similar to 2008, which was positively impacted by income taxadjustments. Excluding positive 2008 tax adjustments, 2009 EPS is targeted toincrease by up to 10%.

 

Wireless revenuesare forecast to increase by 7 to 10% in 2009 due to continued growthin subscribers, increased smartphone adoption and increased wireless dataservice adoption and usage. Wireless EBITDA is expected to increase5 to 8% in 2009.

 

Wireline revenueis expected to increase by up to 3% in 2009, driven by data growth. WirelineEBITDA is expected to decrease by 3 to 7% as a result of increasedpension expenses, upfront expenses associated with growth services (includingearly phase implementation costs for large business contracts), and expectedincreased restructuring charges, offset in part by results from ongoingefficiency initiatives.

 

TELUS expects its2009 EPS to be impacted by slightly increased depreciation and amortizationexpenses, and higher financing costs. The expected increase in financing costsis caused by a higher average debt level from the payment for AWS spectrumlicences in the third quarter of 2008.

 

Capitalexpenditures in 2009 are forecast to be approximately $2.05 billion, inpart due to deferral of some expenditures from 2008. The higher level ofcapital expenditures in 2009 also reflects significant investment in TELUS’shared national next generation wireless network build, investments in networkinfrastructure to improve wireline broadband capabilities, and the developmentof new applications. In addition, this spending will support the capitalrequired to implement new large enterprise contracts in Ontario and Quebec thatare expected to generate significant revenues in future years.

 

TELUS hasreaffirmed its long-term financial policy guidelines, including Net debt toEBITDA of 1.5 to 2.0 times, and a dividend payout ratio guideline of45 to 55% of sustainable net earnings. The 2009 targets align withthese guidelines. EPS, cash balances, net debt and common equity may beaffected by the purchase of up to eight million TELUS shares under the Company’sNCIB program.

 

10

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**Assumptions for 2009 targets**

*** ***

Ongoing wireline competition in both business andconsumer markets, particularly from cable-TV and VoIP companies

* *

Canadian wireless industry market penetration gain ofapproximately 4.5 percentage points for the year, similar to 2008

* *

Downward pressure on wireless ARPU

* *

New competitive wireless entry beginning in the fourthquarter of 2009 with most entrants starting in 2010

* *

Restructuring expenses of approximately$50 million to $75 million ($59 million in 2008)

 

A blended statutory tax rate of approximately 30 to31% (31% in 2008)

 

Net income tax payments of approximately $320 to $350million ($10 million in 2008)

 

Forecast average exchange rate of U.S. $0.80 perCanadian dollar (U.S. $0.94 in 2008)

 

A pension accounting discount rate was estimated at7.00% (subsequently set at 7.25%) and expected long-term return of 7.25%(unchanged from 2008, and consistent with the Company’s long-run returns andits future expectations). Defined benefit pension plans net expenses andfunding were both estimated to increase in 2009, mainly due to the decline invalue of defined benefits pension plans assets in 2008.

 

·*              *Definedbenefit pension plans net expenses were estimated to be $nil in 2009,subsequently revised to approximately $18 million (compared to a$100 million recovery in 2008)

·*              *Definedbenefit pension plans contributions were estimated to be approximately$200 million in 2009, subsequently revised to $211 million($102 million in 2008).

 

## ****

## ** **

## ****

 

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### **1.6 TELUS segments at aglance**

### ** **

The Company hastwo reportable segments: wireline and wireless. Segmentation is based onsimilarities in technology, the technical expertise required to deliver theproducts and services, the distribution channels used and regulatory treatment.Intersegment sales are recorded at the exchange value. Segmented information isregularly reported to the Company’s Chief Executive Officer (the chiefoperating decision-maker). Segmented disclosure is reported in Note 6 ofthe Consolidated financial statements.

 

The followingdiscussion is qualified in its entirety by the *Cautionregarding forward-looking statements* at the beginning of Management’sdiscussion and analysis, as well as *Section 10: Risks andrisk management*.

 

*Wirelinesegment*

 

Offers the following solutions:

 

**Voice** — reliable phone service with longdistance and call management services such as Voice Mail, Call Display and CallWaiting, and the sale, rental and maintenance of telephone equipment;

 

**Internet** — secure high-speed or dial-upaccess with a comprehensive suite of security and entertainment services;

 

**TELUS TV** — flexible digital entertainmentservice with high-definition TV, personal video recorder (PVR), Video on Demandand Pay Per View services;

 

**Data** — IP networks, private line,switched services, network wholesale, network management and hosting;

 

**Converged voice and data solutions** — integrated and hosted IPtelephony solutions through TELUS IP-One® business services;

 

**Hosting and infrastructure** — managed information technologyand infrastructure solutions delivered through TELUS’ IP networks and connectedto the Company’s Internet data centres;

 

**Security solutions** — managed and non-managed solutionsto protect business networks, messaging and data, in addition to securityconsulting services; and

 

**Customized solutions** — global multi-language contactcentre solutions including CallCentreAnywhere, remote agent solutions withTELUS AgentAnywhere®, interactive voice response (IVR) and speech recognitionservices, conferencing and collaboration services, and performanceoptimization, human resource and health and safety outsourcing solutions.

 

Wirelinesegment 2009 targets

 

See *Caution regarding forward-looking statements* at thebeginning of Management’s discussion and analysis.

 

 

 

*Wirelesssegment*

 

Offers the following solutions:

 

**Digital voice** — PCS (postpaid and Pay &Talk® prepaid) and Mike all-in-one (iDEN); Push to TalkTM capability on bothMike (Direct Connect®) and PCS (Instant Talk®);

 

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**Internet and data services** — SPARKTM services including TELUSMobile TV®, TELUS Mobile Radio®, TELUS Mobile Music®, web browsing, WindowsLive Messenger, social networking, text and picture messaging, and downloadablegames, videos, ringtones and images; and

 

**Data devices** — including smartphones and wirelessconnect cards available for use on wireless high-speed and Mike packet datanetworks.

 

Wirelesssegment 2009 targets

 

See *Caution regarding forward-looking statements* at thebeginning of Management’s discussion and analysis.

 

 

**2.****        ****Core business, vision and strategy**

## ** **

The following discussion is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis, and *Section 10: Risks and risk management*.

 

### **2.1 Core business**

### ** **

TELUS Corporationis one of Canada’s largest telecommunications companies, providing a full rangeof telecommunications products and services. The Company is the largestincumbent telecommunications provider in Western Canada and also provides data,IP, voice and wireless services to Central and Eastern Canada. TELUS earns themajority of its revenue from access to, and the use of, the Company’stelecommunications infrastructure, or from providing products and services thatfacilitate access to and usage of this infrastructure.

 

At December 31, 2008,the Company’s principal subsidiary was wholly owned TELUS Communications Inc.(TCI).

 

### **2.2 Vision and strategy**

### ** **

TELUS’ strategic intent, orvision, is to unleash the power of the Internet to deliver the best solutionsto Canadians at home, in the workplace and on the move. TELUS’ strategy forgrowth is to focus on its core telecommunications business in Canada.

 

For nine years, TELUS hasfocused consistently on six strategic imperatives that management believes tobe as relevant in 2009 as when the imperatives were developed in 2000. The siximperatives guide the Company’s actions and contribute to the achievement ofits financial goals. Despite intense competition, evolving technology, andchanging regulatory and competitive environments, TELUS has generated goodoperational results and has continued to advance its national growth strategy,as highlighted below.

 

**Buildingnational capabilities across data, IP, voice and wireless**

 

In July 2008,TELUS successfully concluded bids on 59 licences of advanced wireless services(AWS) spectrum in the 1700 MHz / 2100 MHz ranges in the Industry Canadaauction. The average licensed spectrum acquired by TELUS was 16.2 MHznationally, which increases TELUS’ strong spectrum position, and is expected toprovide capacity for the introduction of future fourth generation (4G) serviceofferings.

 

In September, theCompany turned down its first generation, analog wireless network, deployed inthe mid-1980s. This network had reached the end of its useful service life andonly 27,600 customers were still using it. TELUS included the deactivations ofanalog subscribers in its net subscriber additions and in the calculation ofits wireless churn rate. Competitors may have reported such deactivationsdifferently. TELUS began notifying customers of the network turndown about oneyear earlier and offered options of free digital phones and higher-powered 

 

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long-range phonesat below-cost prices. The deactivation of this network frees up more spectrumfor digital capacity and allows the Company to focus on improvements in thecurrent third generation (3G) network and prepare for future 4G services.

 

In October, TELUSannounced it had chosen long-term evolution (LTE) as the technology path forits 4G wireless broadband network, and as an interim step, the Company began anational build of a next generation wireless service to be launchedcommercially by early 2010, based on the latest version of HSPA technologyusing existing 1900 MHz and 850 MHz spectrum. The HSPA service is expected toaugment TELUS’ existing wireless service portfolio and position the Company foran optimal future transition to LTE. TELUS’ existing portfolio of wirelessservices includes CDMA (code division multiple access) providing access to 3Ghigh-speed data services (EVDO), and iDEN-based Mike service, the Company’sPush To Talk network and business service. LTE is an emerging worldwide 4Gtechnology that has gained support from many of the world’s largest carriersand manufacturers, but it is not expected to be available commercially for anumber of years. The benefits of the investment in HSPA are expected to includeincreased international roaming for existing TELUS customers, access toincreased global roaming revenues for TELUS, faster network speeds, lowerhandset costs due to the larger HSPA device ecosystem, and lower networkdevelopment and ongoing operating costs. TELUS plans to support its CDMA andiDEN (Mike service) customers for the foreseeable future.

 

After acomprehensive review process, the Company selected two suppliers, Nokia SiemensNetworks and Huawei Technologies, for TELUS’ next generation wireless network.TELUS also announced it has entered into an HSPA network sharing agreement withBell Canada using existing 1900 MHz and 850 MHz spectrum. This agreement buildson and enhances an agreement signed in 2001 and is expected to enable TELUS tolower the cost, accelerate deployment of next generation wireless voice anddata services on a national basis, optimize cell-site utilization, and maximizepotential operating efficiencies. Initial capital expenditures for the newnetwork were included in TELUS’ original capital expenditure guidance for 2008and are included in the 2009 targets. See *Caution regardingforward-looking statements* at the beginning of Management’sdiscussion and analysis and risks described in *Section 10.2Technology*. TELUS’ HSPA and LTE evolution strategy is alsoconsistent with the objectives of focusing on the growth markets of data, IPand wireless, and partnering to accelerate TELUS’ strategy.

 

**Focusingrelentlessly on the growth markets of data, IP and wireless**

 

In February, theCity of Montreal selected TELUS to provide and manage IP-based voice and dataservices for the city’s more than 300 administrative offices. TELUS’ advancedtelecommunications framework supports the city’s goals of accessing acost-effective infrastructure, while providing a secure IP backbone for newservices and solutions. The total value of the 10-year contract isapproximately $87 million.

 

Also in February, TELUScompleted the roll-out of wireless high-speed capability in B.C. and Alberta,using EVDO Rev A technology. TELUS’ wireless high-speed service reaches about95% of the population of B.C. and Alberta, providing typical download speeds of450 to 800 Kbps and typical upload speeds of 300 to 400 Kbps.

 

In March, TELUS’ wirelesspostpaid Koodo® brand and service was launched to better address segments ofthe wireless market and complement the fully featured TELUS brand service. Theexpected benefits of this basic brand include more flexibility in servingvarious market segments, increasing postpaid customer additions, protectingrevenue on the premium TELUS brand, and improving client retention programs.

 

Duringthe year, the Company continued to invest in increasing the speed and coverageof its broadband infrastructure in B.C., Alberta, and Eastern Quebec, whilecontinuing to increase its high-speed subscriber base. TELUS TV service waslaunched in several Quebec communities and moved to mass marketing in Calgaryand Edmonton, with the inclusion of high-definition (HD) capabilities and, latein the year, personal video recorders (PVR).

 

InDecember, the Company was selected by the Government of Quebec, through acompetitive bid process, to deliver and manage the province’s next generationdata network, the Réseau intégré de télécommunications multimédias. Thecontract is for a term of seven to 10 years and worth up to $900 million,the largest contract in TELUS’ history. The new network is expected to meet thecurrent and future needs of the government’s new electronic health initiativeand online services, providing connections to 160 ministries and agencies, aswell as 350 health institutions province-wide.

 

**Providingintegrated solutions that differentiate TELUS from its competitors**

 

In March, the Company launchedthe TELUS Visual Voice Mail service that provides a voice mail-to-text functionand, for the first time in Canada, a voice mail-to-e-mail function. With thisservice, TELUS’ wireless customers can access their phone messages whereverthey can access e-mail using smartphones, such as personal digital assistants(PDAs) and BlackBerry devices, or computers. The customer can respond easily tothe messages or e-mails, either by voice or by text, at the touch of a buttonand optionally include an audio recording of the message as an attachment.

 

In June, the Company launched three new globalpositioning system (GPS) solutions for businesses with mobile workers, such asthose in the energy sector. TELUS Asset Tracker enables businesses to keeptrack of their assets, whether large 

 

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or small. TELUS Resource Tracker allows businessesto increase safety and productivity through real-time location monitoring ofworkers. TELUS Track and Dispatch gives businesses the ability to determine theclosest mobile worker to a new job assignment or to immediately dispatch helpif a worker needs assistance. These new solutions are part of the Company’ssuite of wireless GPS solutions on the PCS network that also features TELUSFleet Tracker, a fleet monitoring and tracking solution, and TELUS Navigator, aGPS turn-by-turn navigation solution.

 

**Partnering,acquiring and divesting to accelerate the implementation of TELUS’ strategy andfocus TELUS’ resources on core business**

 

TELUS completedthe acquisition of Emergis in January 2008, having financed and paid$743 million for all of the then issued and outstanding Emergis commonshares by drawing down TELUS’ syndicated bank credit facility and utilizingavailable cash resources, primarily proceeds from commercial paper issuance. InJanuary, TELUS also made a small acquisition of privately held Fastvibe, aprovider of web-streaming solutions for business to strengthen the Company’stechnology solutions portfolio.

 

Emergis is abusiness process outsourcer that specializes in the healthcare and financialservices sectors. TELUS has targeted and invested in serving the healthcare andfinancial business sectors. Emergis’ complementary expertise, applications andcustomer base are expected to strengthen TELUS’ existing industry solutions andallow it to better compete in the fast-growing and transforming healthcareindustry. This acquisition is consistent with three of TELUS’ strategicimperatives: building national capabilities; focusing relentlessly on thegrowth markets of data, IP and wireless; and partnering, acquiring anddivesting.

 

TELUS Ventures received a $6 million gain fromits 2001 minority investment in Hostopia, a provider of private-branded webhosting, e-mail and e-commerce solutions to telecommunications and cable-TVcompanies, Internet service providers, domain registrars, and other web serviceproviders. Deluxe Corporation’s all-cash offer for Hostopia closed in earlyAugust. TELUS Ventures invested in Hostopia to complement TELUS’ existingservices, as part of TELUS’ strategy to benefit from emerging technologiesthat fill the Company’s capability gaps.

 

**Goingto the market as one team under a common brand, executing a single strategy**

 

On completion ofEmergis and Fastvibe acquisitions, TELUS immediately began implementingpost-merger integration plans to ensure a seamless transition for team membersand customers, while ensuring a continued focus on achieving the business goalsof the transactions. Consistent with TELUS’ standard process for acquisitions,Emergis and Fastvibe team members were welcomed at multiple city in-personevents and videoconferences. Customers were provided with notice of thetransactions, together with the strategic rationale, while sales specialistteams from TELUS and the acquired businesses met to learn about one another’sproducts and services with a focus on cross-selling complementary solutions.Emergis was quickly re-branded as Emergis, a TELUS company, and Fastvibecommenced operating under the TELUS brand.

 

The post-mergerintegration process included the identification of top joint-salesopportunities and working together to close multimillions of dollars of newcontracts. The teams also initiated an update to the three-year strategicbusiness plans for healthcare and financial services. In addition, certainbusiness functions were aligned, including Finance, Human Resources and Marketing.In November, the Company launched TELUS Health Solutions, Backed by Emergis,and made a commitment to invest $100 million over three years in thehealthcare sector.

 

**Investingin internal capabilities to build a high-performance culture and efficient operations**

 

In July,following a large pilot implementation for 150,000 residential customers inBritish Columbia, TELUS successfully converted more than one million B.C.wireline residential subscribers to a new billing and client care platform.This platform is converged with the one in Alberta, and for the first time mostresidential customers in Alberta and B.C. are on the same billing and clientcare platform. During the B.C. conversion, TELUS applied learnings from theAlberta conversion in 2007 and the B.C. implementation was successful. Thecritical billing function performed as expected and billing cycles weremaintained. The order entry system also performed well without capacity andstability issues experienced initially with the Alberta conversion. Servicelevels have not been materially impacted following the 2008 conversion. Theexpected customer service and cost benefits of this project include streamlinedand standardized processes and the elimination over time of multiple legacyinformation systems.

 

In September, anew collective agreement with the members of the Syndicat des agents demaîtrise de TELUS (SAMT) was ratified, and will remain in effect until December 31,2011. The SAMT agreement covers more than 500 professional and supervisory teammembers employed in Quebec. TELUS currently employs approximately 5,000 teammembers in the province.

 

The Companyembarked on a number of operational efficiency initiatives, as describedfurther in *Section 3*.

 

In October, TELUSand the Government of Quebec announced a training program and the creation of149 jobs in the Company’s technical support team located in the province. Morethan $1.6 million will be invested in this value-added 

 

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training program,of which $405,000 is from Emploi-Québec. As TELUS’ wireless service customersincreasingly adopt smartphones with diverse functions, they call morefrequently for technical assistance. The new training program will provideadvanced skills to technicians who provide support to TELUS customers acrossCanada.

 

TELUS continuesto focus on engaging its team members (up five points in the 2008 fallPulsecheck survey) and creating a culture of high performance and appreciationbased on shared values and continuous learning. Initiatives included launchingCareer Alert, which provides team members with an enhanced career planning andprogression tool to explore internal career opportunities; providing access toonline learning courses, literature and mentoring opportunities; enhancingTELUS’ performance development program; introducing Bravo, an upgraded teammember recognition and rewards program; and expanding TELUS’ Healthy Livingprogram to support the well-being and safety of team members.

 

## **3.**              Key performance drivers

## ** **

The following discussion is qualified in itsentirety by the *Caution regarding forward-looking statements*at the beginning of Management’s discussion and analysis. It is also qualifiedby *Section 10: Risks and risk management*.

 

Management confirms or sets corporate prioritieseach year to advance TELUS’ strategy, focus on the near-term opportunities andchallenges to create value for shareholders.

 

**Corporate priorities**

 
| **2007**                                                                                                                                                                                                                                                                                                                         | ** ** | ** ** | ** ** | **2008 (see Progress, following)**                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** | ** ** | **2009**                                                                                                                                                                                                                                                                                                                                                                   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Advancing TELUS’ position in the consumer,  business and wholesale markets

 

Driving TELUS’ technology evolution and  improvements in productivity and service excellence

 

Strengthening the spirit of the TELUS team and  brand, and developing the best talent in the global communications industry. | ** ** | **à** |       | Drive profit from strategic services with a  focus on data

 

Build scale in vertical markets and leverage  the Emergis acquisition

 

Exact productivity gains from efficiency  improvement initiatives

 

Elevate the client experience and build  enhanced loyalty

 

Execute technology initiatives, including  broadband and IT platforms. | ** ** | **à** |       | Execute on TELUS’ broadband strategy,  leveraging investments in leading wireline and wireless networks to deliver  winning solutions for customers

 

Increase the efficiency of operations to  improve TELUS’ cost structure and economic performance

 

Outpace the competition and earn the patronage  of clients through an engaged TELUS team. | * *   |

### ** **

**Corporate priorities for 2008 —Progress**

 

**Drive profit from strategicservices with a focus on data**

 

·                  Growth inwireless included record TELUS gross subscriber loading and very strong 55%wireless data revenue growth

 

·                  TELUS sawstrong smartphone adoption in 2008, with the launch of a wide selection of PCSdevices backed by innovative marketing campaigns. Devices included the PinkBlackBerry Pearl 8130, Curve 8330 and new touchscreen BlackBerry Storm; SamsungInstinct; LG KEYBO, LG Dare, LG Voyager and LG Venus; and HTC Touch Diamond

 

·                  Starting atmid-year, wireless margins were negatively impacted by the low $199 price pointintroduced on the Apple iPhone by a competitor, which increased devicediscounts for all smartphones in Canada that have a typical cost of $500 to$600. In addition, the late delivery of the BlackBerry Storm largely missed theChristmas sales season and reduced the effectiveness of associated advertising

 

·                  Wirelinedata growth was 17% due largely to the strategic acquisition of Emergis (seebelow).

 

**Build scale in verticalmarkets and leverage the Emergis acquisition**

 

·                The Companycontinued to implement large complex deals in the public sector, including contractswith the Government of Ontario, Department of National Defence and City ofMontreal, plus several corporate deals in other industry vertical markets

 

·                While TELUScontinues to win contracts based on the excellence of its implementation trackrecord, not all implementations go smoothly given the scale, complexity of theIT solutions and reliance on third parties. The Company has addressed the issueby consolidating three business units into two, refocused on project processplanning and risk mitigation, and conducting reviews to identify learnings forother project implementations

 

·                Late inyear, won a seven-to-10-year contract, worth up to $900 million, with theGovernment of Quebec for a managed data network to serve 160 offices and 350health institutions across the province

 

·                TELUS’capability in the healthcare and financial vertical markets increased with theacquisition and successful integration of Emergis. Emergis’ service portfolioand eastern presence provided a good geographical and service fit with TELUS’existing services in the West, as described more fully in *Section 2*

 

·                TELUSHealth Solutions was launched, including a $100 million investment overthree years, demonstrating commitment to this important growth area

 

·                TELUS wasnamed 2008 Health Company of the Year by the Information Technology Associationof Canada.

 

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**Corporate priorities for 2008 —Progress**

 

**Exact productivity gainsfrom efficiency improvement initiatives**

 

·                  Progress onefficiency initiatives was disappointing in the first half of the year, leadingto a refocused effort in the second half. Restructuring charges were$48 million in the second half of 2008 and only $11 million in thefirst six months. The Company expects a more consistent focus in 2009

 

·                  In thefall, the Company began reorganization of three enabling business units,Technology strategy, Network operations, and Business transformation, into twointegrated teams: Technology strategy and Business transformation andtechnology operations. Expected benefits include streamlined operations, more effectivedeployment of technologies and supporting systems, cost efficiencies andimproved customer service

 

·                  Operationalefficiency initiatives also include redirecting resources to growing parts ofthe business, optimization of layers of management and spans of control toreduce staff, organization-wide expense control, increased use of businessprocess outsourcing and internal off-shoring, rationalization of products inlow-value activities, consolidation of vendor management and reducing thenumber of vendors. In addition to team redeployments, reductions in positionswere made in December 2008 and January 2009, mostly in managementranks

 

·                  Year-endemployee performance bonuses were reduced due to below plan operationalperformance, and management compensation has been frozen for 2009.

 

**Elevate the clientexperience and build enhanced loyalty**

 

·                  TELUScontinued to achieve high retail service levels, as measured by an array ofquality of service measures

 

·                  Wirelesschurn (a measure of the monthly customer disconnect rate) was up slightly in2008 at 1.57%, including deactivationsfrom turning down the Company’s analog network

 

·                  Created newtraining initiatives for call centre agents, including the introduction of avideo that clarifies processes and policies between Customer Care and theCustomer Solutions Delivery teams

 

·                  Launchingtwo-hour appointment windows, offering weekend and evening service forresidential and small and medium-sized business customers, and leveragingcustomer surveys to build upon customer feedback.

 

**Execute technologyinitiatives, including broadband and IT platforms**

 

·                  LTE waschosen for future wireless 4G technology, and TELUS began implementing an HSPAnext generation wireless network as an optimal path to transition to LTE, morefully described in *Section 2*.The project included an enhanced, joint network sharing agreement with BellCanada to speed the network launch and maximize coverage, and selection of twoworld-leading equipment suppliers  —Nokia Siemens Networks and Huawei Technologies

 

·                  Broadbandcoverage was expanded, facilitating high-speed Internet sales and increasedtraction in TELUS TV sales. Commercially launched high-definition (HD) TELUS TVin select areas and, late in year, personal video recorder (PVR) service

 

·                  Thebroadband coverage footprint in Edmonton, Calgary and Rimouski is sufficientfor mass marketing TELUS TV, but not yet in the major market of Lower Mainlandof B.C. (Vancouver area), which remains a priority for 2009

 

·                  Smoothlyconsolidated legacy wireline ordering, provisioning, customer management andbilling software onto a single advanced platform for more than one millionresidential subscribers in B.C. — the same platform most Alberta residentialsubscribers migrated to in 2007. Front-line agents can better manage customers’services from a single application in both B.C. and Alberta.

 

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## **4.**     Capabilities

 

The following discussion is qualified in itsentirety by the *Caution regarding forward-lookingstatements* at the beginning ofManagement’s discussion and analysis. It is also qualified by *Section 10:Risks and risk management.*

 

### **4.1 Principal markets addressed and competition**

 

**National wireless services for consumers andbusinesses**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| Licensed national wireless spectrum, with network covering most of  Canada’s population, with domestic and international roaming agreements

 

Wireless networks  interconnected with TELUS’ wireline networks

 

Provider of integrated digital wireless voice, data and Internet  services on a nationwide digital PCS (CDMA) network, including a 3G  high-speed coast-to-coast network in Canada with high-speed evolution data  optimized (EVDO) overlay. Services are further described in *Section 1.6*

 

·*   *Access to 96% of the Canadian  population, when roaming/resale agreements principally with Bell Canada are  included

 

·*   *High-speed EVDO overlay reaches  88% of the Canadian population, when roaming/resale agreements are included

 

TELUS’ iDEN network-based Mike service, a Push To Talk service focused  on the commercial marketplace

 

TELUS’ wireless technology and service evolution is described in *Section 2.2 Vision and Strategy — Building national capability*

 

·*   *Build-out of a next generation  wireless HSPA network began in 2008 with services expected to be launched  commercially by early 2010, augmenting TELUS’ existing wireless service  portfolio and providing for an optimal future transition to LTE 4G services

 

·*   *HSPA network sharing agreement  with Bell Canada, building on and enhancing an agreement signed in 2001. |       | Existing  wireless service competition includes services offered by:

 

·*   *Facilities-based national  competitors Rogers Wireless and Bell Mobility

 

·*   *Facilities-based provincial  telecommunications companies SaskTel and MTS Mobility

 

·*   *Resellers of Bell Mobility’s and  Rogers Communications Inc.’s networks, such as the Virgin Mobile Group,  7-Eleven and certain cable-TV companies

 

Emerging wireless service  competition includes:

 

·*   *New wireless competitors,  including cable-TV companies, expected to begin offering services with  various regional coverage, beginning in late 2009, or 2010, as a result of  the AWS spectrum auction in 2008

 

·*   *Potential alliances and  integrations among new regional competitors

 

Foreign ownership  restrictions apply to facilities-based wireless service providers. |

 

**National wireline business services**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| An IP-based national network overlaying an  extensive switched network in incumbent territories in B.C., Alberta and  Eastern Quebec

 

Global interconnection arrangements

 

Services are further described in  Section 1.6 and include:

 

·*   *Voice and  data services

 

·*   *Converged  voice and data solutions

 

·*   *Hosting  and infrastructure

 

·*   *Wholesale  services provided to telecommunications carriers, resellers, Internet service  providers (ISPs), wireless providers, competitive local access providers and  cable-TV operators

 

·*   *Global  contact solutions

 

·*   *Customized  solutions, such as provision of business process outsourcing services to the  healthcare, human resources and financial services sectors

 

·*   *Certain  services facilitated by multi-lingual international call centres

 

Majority  of service revenue in incumbent territories and services in non-incumbent  areas, such as Ontario and Quebec, are not rate regulated. |       | Competition for voice and  data communications services includes:

 

·*   *Principally  Bell Canada, as well as MTS Allstream and cable-TV companies competing with  their own national infrastructures

 

·*   *Substitution  to wireless services including those offered by TELUS.

 

Wholesale service  competitors include Bell Canada, MTS Allstream, and Rogers

 

Competitors  for call centre services include Convergys, Sykes and Verizon LiveSource

 

Competitors  for customized managed outsourcing solutions include system integrators CGI,  EDS and IBM. |

 

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**Wireline consumer services in incumbentterritories of British Columbia, Alberta and Eastern Quebec**

 
| **TELUS capability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Competition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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| Access to almost every urban and rural home  and business in incumbent territories in B.C., Alberta and Eastern Quebec.  TELUS wireline residential access line services are provided to an estimated  66% of households in B.C. and Alberta

 

Extensive switched network and significant investment in Internet  infrastructure, and access to an IP-based national network

 

·*   *Provision  of local, long distance and Internet services

 

Broadcasting distribution licences to offer digital television  services in select communities in incumbent territories and licences to offer  commercial video-on-demand services

 

·*   *TELUS TV  services have been available to an increasing number of communities since  2005

 

·*   *High-definition  (HD) TV and personal video recorder (PVR) capabilities are increasingly  available starting in 2008. |       | ·*   *Substitution  of wireless services, including TELUS’ own wireless offerings, for local and  long distance services. Households with wireless telephone services only  (amongst all providers, including TELUS) are estimated to be 12% in B.C. and  Alberta

 

·*   *Cable-TV  providers Shaw Communications Inc. in B.C. and Alberta, and Cogeco Cable in  Eastern Quebec, that have access to urban and suburban homes to provide  Internet, entertainment and VoIP-based telephony services

 

·*   *Rogers  Communications, Bell Canada and potentially Shaw Communications, providing a  varying combination of local, long distance, Internet and entertainment  services

 

·*   *Various  others (e.g. Vonage) that offer resale or VoIP-based local and long distance  and Internet services

 

·*   *Satellite-based  entertainment and Internet services (Bell Canada and Shaw Communications). |

 

19

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### **4.2 Operational resources**

 
| **Operational resources**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Operational risks and risk management**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **People**

 

The  Company employs 35,900 full-time equivalent multi-skilled TELUS team members  across a wide range of operational functions

 

TELUS  uses a small number of external contractors or consultants

 

Wireless  service is dependent on extensive distribution network of exclusive dealers  and third-party electronics retailers (e.g. Future Shop, London Drugs)

 

The  Company has adequate employee resources to cover ongoing retirements, and  ready access to labour in Canada and, for call centres, in various locations  internationally

 

The  Company has extensive training programs in place and has universal scorecard  metrics that tie personal and corporate performance to bonus pay. |       | Employee  compensation, retention and labour relations — See *Section 10.4 Human  resources*

 

General  safety — See *Section 10.8 Health, safety and  environment*

 

Due  to overheating in the Alberta economy, the Company did experience some  difficulties in retaining and hiring qualified staff in 2008. However, this  has abated in 2009 due to the economic slowdown

 

Approximately  14,650 team members are covered by a collective agreement, with a large  majority (approximately 13,500) covered by collective agreements expiring in  2010 or 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Brand  and services**

 

The  Company has a well established and recognizable national brand that is  supported by extensive advertising across all media

 

Successfully  introduced the new wireless Koodo Mobile basic brand and service in  March 2008

 

Services  are summarized in *Section 4.1*  above.                                                                                                                                                                                                                                                                                                                                                                                                              | * *   | Industry  and economy — See *Section 9: General  outlook* and *Section 10.11  Economic growth and fluctuations.*

 

Competition  — See *Section 4.1* above and *Section 10.1*

 

Regulation  — See *Section 10.3*

 

·*   *None of  the Wireless segment revenues are currently subject to CRTC price regulation

 

·*   *Less than  one-quarter of the Company’s revenues are from Wireline segment regulated  services and subject to CRTC price regulation

 

·*   *Deregulation  of local phone services for residential markets covering approximately 80% of  its residential lines in non-high cost serving areas, or 67% of total  residential and business lines

 

·*   *Non-incumbent  local exchange carrier (non-ILEC) services, long distance, Internet,  international telecommunications, inter-exchange private line and certain  data services, as well as the sale of customer premises equipment, continue  to be forborne from regulation. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | * *   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Technology  and systems**

 

TELUS  is a highly complex technology-dependent company with a multitude of  interconnected wireline and wireless telecommunications networks, IT systems  and processes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | Technology  — See *Section 10.2*

 

Process  risks — *See Section 10.5*

 

Manmade  and natural threats — See *Section 10.10.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

### **4.3 Liquidity and capital resources**

 

The following discussion is qualified in itsentirety by Risks and risk management — *Section 10.6Financing and debt requirements*.

 

*Capitalstructure financial policies (Note 3 of the Consolidated financial statements)*

 

The Company’s objectives whenmanaging capital are: (i) to maintain a flexible capital structure thatoptimizes the cost of capital at acceptable risk; and (ii) to managecapital in a manner that balances the interests of equity and debt holders.

 

In the management of capital, the Company includes shareholders’ equity(excluding accumulated other comprehensive income), long-term debt (includingany associated hedging assets or liabilities, net of amounts recognized inaccumulated other comprehensive income), cash and temporary investments andsecuritized accounts receivable in the definition of capital.

 

The Company manages the capital structure and makes adjustments to itin light of changes in economic conditions and the risk characteristics of theunderlying assets. In order to maintain or adjust the capital structure, theCompany may adjust the amount of dividends paid to shareholders, purchaseshares for cancellation pursuant to normal course issuer bids, issue newshares, issue new debt, issue new debt to replace existing debt with differentcharacteristics and/or increase or decrease the amount of sales of tradereceivables to an arm’s-length securitization trust.

 

20

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TheCompany monitors capital utilizing a number of measures, including: net debt toEBITDA — excluding restructuring costs; and dividend payout ratio ofsustainable net earnings. For further discussion and specific guidelines, see *Section 7.4 Liquidity and capital resource measures*.

 

*Financingand capital structure management plans*

 

Activitiessupporting the 2008 financing plan, as outlined in 2007’s Management’sdiscussion and analysis, are described below and are followed by plans for2009.

 

***Reportingback on TELUS’ 2008 financing and capital structure management plan***

 

**Repurchase TELUS Common Shares and TELUSNon-Voting Shares under the normal course issuer bid (NCIB)**

 

In 2008, the Company repurchased for cancellation approximately onemillion Common Shares and 5.8 million Non-Voting Shares for a total outlayof $280 million. *See Section 7.3 Cashused by financing activities.* Since December 20, 2004, TELUShas repurchased 20.2 million of its Common Shares and 39.5 million ofits Non-Voting Shares for $2.8 billion under four NCIB programs,consistent with the Company’s intent to return surplus cash to shareholders.

 

**Pay dividends**

 

The dividend declared for the fourth quarter of 2008 (paid January 2,2009) was 47.5 cents per share, up by 5.6% from 45 cents per share in the sameperiod in 2007, and representing the fifth consecutive annual increase in thequarterly dividend.

 

**Use proceeds from securitized receivables and bankfacilities, as needed, to supplement free cash flow and meet other cashrequirements**

 

At December 31, 2008, the balance of proceeds from securitized accountsreceivable was $300 million, up by $50 million from September 30,2008, up by $150 million from June 30, 2008, and reduced by$200 million from March 31, 2008 and December 31, 2007. Thereduction in securitized accounts receivable of $350 million during thesecond quarter was completed following the closing of the public debt issue inApril, while the increase in the second half can be attributed to the purchaseof AWS wireless spectrum in the third quarter.

 

In January 2008, the Company increased utilization of the$2 billion 2012 credit facility. The proceeds were used for generalcorporate purposes, including the purchase of Emergis. At December 31,2008, the balance drawn on the 2012 revolving credit facility was$980 million, up from $430 million at September 30, 2008,$162 million at June 30, 2008, $321 million at March 31,2008, and the nil amount drawn at the beginning of the year. The increaseduring the first quarter helped fund the acquisition of Emergis, while theincrease in the third quarter was used to fund payment for AWS spectrumlicences. The increase in the fourth quarter was offset by a reduction inoutstanding commercial paper.

 

**Maintain compliance with financial objectives,policies and guidelines**

 

Maintain a minimum $1 billion in unutilized liquidity — On March 3, 2008, the Company closed a new$700 million, 364-day credit facility with a select group of Canadianbanks.In December, the Company renewedthis $700 million, 364-day credit facility, extending the term to March 1,2010 under substantially the same terms and conditions, except for increasedcost. The 364-day facility provides incremental liquidity to TELUS and allowsthe Company to continue to meet one of its financial objectives, which is togenerally maintain $1 billion in available liquidity. The Company hadunutilized credit facilities of $1.15 billion at December 31, 2008,including the 364-day facility, as well as unutilized availability under itsaccounts receivable securitization program. See *Section 7.5Credit facilities*.

 

Net debt to EBITDA excluding restructuring costs ratioof 1.5 to 2.0 times — Actual result of 1.9 times at December 31,2008.

 

Dividend payout ratio of 45 to 55% of sustainable netearnings on a prospective basis— The ratio was 56% when calculated based on the annualized fourth quarterdividend rate and earnings per share adjusted to exclude the impacts offavourable tax-related adjustments for 2008. The ratio was 54%, based on theannualized fourth quarter dividend rate and actual earnings per share for 2008.

 

**Maintain position of fully hedging foreignexchange exposure for indebtedness**

 

Maintained for the 8.00% U.S.dollar Notes due 2011, the one remaining foreign currency-denominated debtissue.

 

**Give consideration to accessing the public debtmarkets in 2008 to refinance short-term financing sources with long-termfinancing**

 

In April, TELUS successfully closed its offering of 5.95%, Series CENotes due April 15, 2015, for aggregate gross proceeds of approximately$500 million. The net proceeds of the offering were used for general corporatepurposes including repayment of amounts under the 2012 credit facility, and torefinance short-term financing sources. In August 2008, the Companyincreased the maximum size of its commercial paper program from$800 million to $1.2 billion, which is backstopped by the Company’s2012 credit facility. At December 31, 2008, $432 million ofcommercial paper was outstanding. Generally, the Company employs thelowest-cost sources of funds, which may vary over time among various debtinstruments.

 

21

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***Reportingback on TELUS’ 2008 financing and capital structure management plan***

 

**Preserve access to the capital markets at areasonable cost by maintaining investment grade credit ratings and targetingimproved credit ratings in the range of BBB+ to A—, or the equivalent, in thefuture**

 

At February 11, 2009, investment grade credit ratings from the fourrating agencies that cover TELUS were in the desired range. TELUS’ April 2008debt issue was assigned credit ratings of: A (low) by DBRS Ltd., Baa1 byMoody’s Investors Service, BBB+ by Fitch Ratings, and BBB+ by Standard andPoor’s, all with a stable trend or outlook and all consistent with theagencies’ existing ratings for TELUS debt securities. On August 7, 2008,DBRS Ltd. confirmed its R-1 (low), stable, rating for TELUS’ commercial paperprogram. See*Section 7.7 Credit ratings*.

 

***TELUS’ 2009 financing and capital structure management plan***

 

At December 31,2008, TELUS had access to undrawn credit facilities of more than$1.15 billion, as well as availability under its accounts receivablesecuritization program. The Company has no significant maturities of long-termdebt until 2011. The Company believes it has sufficient capability to fund itsrequirements from these facilities and expects to generate free cash flow in2009, which would be available to, among other things, repurchase shares andpay dividends to shareholders. While anticipated cash flow is expected to bemore than sufficient to meet current operating requirements, TELUS may issuelong-term public debt or establish new term credit facilities in 2009 torefinance short-term financing sources or upcoming debt maturities.

 

In 2009, TELUSplans to remain in compliance with its financial policies, and these intentionscould constrain TELUS’ ability to invest in its operations for future growth orto complete share repurchases. TELUS has set its financial policies with theexpectation that substantial cash tax payments will commence in 2009 both inrespect of 2008 and on an instalment basis in respect of 2009. Payment of cashincome taxes will reduce the after-tax cash flow otherwise available to returncapital to shareholders. The Company also expects to make increased contributionsto its employee defined benefit pension plans in 2009, as described in *Section 1.5*. If actual results are different from TELUS’expectations, there can be no assurance that TELUS will not need to change itsfinancing plans, including its intention to repurchase shares under the NCIBprogram, or pay dividends according to the target payout guideline.

 

TELUS expects tomaintain its current position of fully hedging its foreign exchange exposurefor indebtedness. At the end of 2008, 77% of TELUS’ total debt was on afixed-rate basis, and the weighted average term to maturity was approximatelyfour years.

 

At December 31, 2008, TELUS also has access to a shelf prospectuspursuant to which it can issue $2.5 billion of debt and equity. TELUSbelieves that its investment grade credit ratings provide reasonable access tocapital markets to facilitate future debt issuance. For the related riskdiscussion, see *Section 10.6 Financing and debtrequirements.*

 

**Debt maturities as at December 31,2008**

 
| ** **            | ** ** | **Long-term debt  maturities ****(1)****,  principal** | ** ** | **Interest**        | ** ** |
|-----------------------|------------|------------------------------------------------------------------|------------|---------------------|------------|
| **($ millions)** | ** ** | **All except  capital  leases**                             | ** ** | **Capital  leases** | ** ** | **and like  carrying  costs ****(2)** | ** ** |
| 2009                  |       | 1                                                                |       | 3                   |       | 462 |   |
| 2010                  |       | 80                                                               |       | 2                   |       | 460 |   |
| 2011                  |       | 2,950                                                            |       | —              |       | 330 |   |
| 2012                  |       | 1,712                                                            |       | —              |       | 179 |   |
| 2013                  |       | 300                                                              |       | —              |       | 147 |   |
| Thereafter            |       | 1,949                                                            |       | —              |       | 750 |   |
| Total                 |       | 6,992                                                            |       | 5                   |       | 2,328 |   |

 

----

(1)*   *Whereapplicable, principal-related maturities reflect foreign currency exchangerates at December 31, 2008.

(2)*   *Interestand like carrying costs for commercial paper and amounts drawn under the Company’scredit facility have been calculated based upon rates in effect as at December 31,2008.

 

### **4.4 Disclosure controls and procedures andinternal control over financial reporting**

 

*Disclosure controls and procedures*

 

Disclosure controls and procedures are designed toprovide reasonable assurance that all relevant information is gathered andreported to senior management, including the President and Chief ExecutiveOfficer (CEO) and the Executive Vice-President and Chief Financial Officer(CFO), on a timely basis so that appropriate decisions can be made regardingpublic disclosure.

 

The CEO and the CFO have evaluated theeffectiveness of the Company’s disclosure controls and procedures related tothe preparation of Management’s discussion and analysis and the Consolidatedfinancial statements. They have concluded that the Company’s disclosurecontrols and procedures were effective, at a reasonable assurance level, toensure that material information relating to the Company and its consolidatedsubsidiaries would be made known to them by others within those entities,particularly during the period in which the Management’s discussion andanalysis and the Consolidated financial statements contained in this reportwere being prepared.

 

22

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*Internal control over financialreporting*

 

Internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements in accordance withCanadian GAAP and the requirements of the Securities and Exchange Commission inthe United States, as applicable. TELUS’ CEO and CFO have assessed theeffectiveness of the Company’s internal control over financial reporting as at December 31,2008 in accordance with *Internal Control —Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment,TELUS’ CEO and CFO have determined that the Company’s internal control over financialreporting is effective as at December 31, 2008 and expect to certify TELUS’annual filings with the U.S. Securities and Exchange Commission on Form 40-F,as required by the United States *Sarbanes-Oxley Act*,and with Canadian securities regulatory authorities.

 

Deloitte & Touche LLP, the Company’sauditor, has audited internal controls over financial reporting of TELUSCorporation as at December 31, 2008.

 

*Changes in internal control overfinancial reporting*

 

There were no changes in internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

23

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## **5.***    *Results from operations

 

### **5.1 Selected annual information**

 

Thefollowing selected three-year consolidated financial information has beenderived from and should be read in conjunction with the Consolidated financialstatements of TELUS for the year ended December 31, 2008, and its annualConsolidated financial statements for previous years.

 
| **Years ended December 31****($ in millions, except per share amounts)** | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                                                                                  |       |       |       |     |       |     |       |
| Operating  revenues                                                                                                   | ** ** | **9,653**  |       | 9,074    |       | 8,681    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Operations  expense (1)                                                                                               | ** ** | **5,815**  |       | 5,465    |       | 4,998    |       |
| Restructuring  costs                                                                                                  | ** ** | **59**     |       | 20       |       | 68       |       |
| Depreciation  and amortization                                                                                        | ** ** | **1,713**  |       | 1,615    |       | 1,576    |       |
| Total  operating expenses                                                                                             | ** ** | **7,587**  |       | 7,100    |       | 6,642    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Financing  costs and other expense                                                                                    | ** ** | **499**    |       | 476      |       | 533      |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Income  before income taxes and non-controlling interest                                                              | ** ** | **1,567**  |       | 1,498    |       | 1,506    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Income taxes                                                                                                          | ** ** | **436**    |       | 233      |       | 353      |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Net income  and Common Share and Non-Voting Share income                                                              | ** ** | **1,128**  |       | 1,258    |       | 1,145    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Earnings per  share (2) — basic                                                                             | ** ** | **3.52**   |       | 3.79     |       | 3.33     |       |
| Earnings per  share (2) — diluted                                                                           | ** ** | **3.51**   |       | 3.76     |       | 3.30     |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Cash  dividends declared per share (2)                                                                                | ** ** | **1.825**  |       | 1.575    |       | 1.20     |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Total assets                                                                                                          | ** ** | **19,160** |       | 16,988   |       | 16,661   |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Current  maturities of long-term debt                                                                                 | ** ** | **4**      |       | 5        |       | 1,434    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Long-term  debt                                                                                                       | ** ** | **6,348**  |       | 4,584    |       | 3,475    |       |
| Derivative  and other long-term financial liabilities                                                                 | ** ** | **1,103**  |       | 1,507    |       | 1,037    |       |
| Total  long-term financial liabilities                                                                                | ** ** | **7,451**  |       | 6,091    |       | 4,512    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Future  income taxes                                                                                                  | ** ** | **1,255**  |       | 1,048    |       | 1,077    |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Non-controlling  interests                                                                                            | ** ** | **23**     |       | 26       |       | 24       |       |
|                                                                                                                  |       |       |       |     |       |     |       |
| Common  equity                                                                                                        | ** ** | **7,182**  |       | 6,926    |       | 7,048    |       |

 

----

(1)  Includingnet-cash settlement feature expense of $169 million in 2007.

(2)  CommonShares and Non-Voting Shares.

 

Changes over the three years include:

 

·*     *Revenues increased in 2008 and 2007due to growth in wireless services and wireline data services, with wirelineincluding two acquisitions in January 2008. Wireless revenues and wirelinedata revenues represent approximately 69% of consolidated revenues in 2008, ascompared to 67% in 2007 and 63% in 2006;

 

·*     *Total operating expenses includeincreased amortization of intangible assets in 2007 and 2008, which isprimarily from implementation of converged billing and client care softwaresupporting residential customers in Alberta and B.C., as well as amortizationof software from the acquisition of Emergis in January 2008. Acquisitionsin January 2008 contributed to the increase in operations expense in thatyear. In 2007, the introduction of a net-cash settlement feature for shareoption awards granted prior to 2005 increased operations expense by$169 million;

 

·*     *Financing costs and other expensesinclude varying amounts of interest income; and

 

·*     *Net income included significantfavourable income tax-related adjustments, resulting from legislated income taxchanges, settlements and tax reassessments for prior years, including anyrelated interest. The amounts were approximately $49 million (15 cents pershare) in 2008, $257 million (78 cents per share) in 2007 and$171 million (50 cents per share) in 2006.

 

 

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### **5.2 Quarterly results summary and fourth quarterrecap**

 
| **($ in millions, except per share  amounts)** | ** ** | **2008 Q4** | ** ** | **2008 Q3** | ** ** | **2008 Q2** | ** ** | **2008 Q1** | ** ** | **2007 Q4** | ** ** | **2007 Q3** | ** ** | **2007 Q2** | ** ** | **2007 Q1** | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                                    |       |             |       |             |       |             |       |             |       |             |       |             |       |             |       |             |       |
| Operating  revenues                                                     | ** ** | **2,454**        |       | 2,450            |       | 2,399            |       | 2,350            |       | 2,330            |       | 2,310            |       | 2,228            |       | 2,206            |       |
| Operations  expense (1)                                                 | ** ** | **1,479**        |       | 1,465            |       | 1,477            |       | 1,394            |       | 1,371            |       | 1,317            |       | 1,340            |       | 1,437            |       |
| Restructuring  costs                                                    | ** ** | **38**           |       | 10               |       | 4                |       | 7                |       | 6                |       | 6                |       | 3                |       | 5                |       |
| EBITDA (2)                                                              | ** ** | **937**          |       | 975              |       | 918              |       | 949              |       | 953              |       | 987              |       | 885              |       | 764              |       |
| Depreciation                                                            | ** ** | **351**          |       | 344              |       | 343              |       | 346              |       | 386              |       | 333              |       | 318              |       | 318              |       |
| Amortization  of intangible assets                                      | ** ** | **84**           |       | 92               |       | 77               |       | 76               |       | 68               |       | 70               |       | 73               |       | 49               |       |
| Operating  income                                                       | ** ** | **502**          |       | 539              |       | 498              |       | 527              |       | 499              |       | 584              |       | 494              |       | 397              |       |
| Other  expense (income)                                                 | ** ** | **11**           |       | 6                |       | 2                |       | 17               |       | 6                |       | 8                |       | 18               |       | 4                |       |
| Financing  costs                                                        | ** ** | **118**          |       | 122              |       | 114              |       | 109              |       | 109              |       | 86               |       | 127              |       | 118              |       |
| Income  before income taxes and non-controlling interest                | ** ** | **373**          |       | 411              |       | 382              |       | 401              |       | 384              |       | 490              |       | 349              |       | 275              |       |
| Income taxes  (recovery)                                                | ** ** | **88**           |       | 125              |       | 114              |       | 109              |       | (19              | )          | 79               |       | 94               |       | 79               |       |
| Non-controlling  interests                                              | ** ** | **—**       |       | 1                |       | 1                |       | 1                |       | 3                |       | 1                |       | 2                |       | 1                |       |
| Net income                                                              | ** ** | **285**          |       | 285              |       | 267              |       | 291              |       | 400              |       | 410              |       | 253              |       | 195              |       |
| Income per  Common Share and                                            | ** ** | **0.90**         |       | 0.89             |       | 0.83             |       | 0.90             |       | 1.23             |       | 1.24             |       | 0.76             |       | 0.58             |       |
| Non-Voting  Share - basic                                               | ** ** | ** **       |       |             |       |             |       |             |       |             |       |             |       |             |       |             |       |
| - diluted                                                               | ** ** | **0.89**         |       | 0.89             |       | 0.83             |       | 0.90             |       | 1.22             |       | 1.23             |       | 0.75             |       | 0.57             |       |
| Dividends  declared per Common Share and Non-Voting Share               | ** ** | **0.475**        |       | 0.45             |       | 0.45             |       | 0.45             |       | 0.45             |       | 0.375            |       | 0.375            |       | 0.375            |       |

 

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| (1)*   *Includes net-cash settlement  feature expense (recovery):                                                                        | ** ** | **—** |   | — |   | — |   | — |   | 1 |   | (7 | ) | 1 |   | 174 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|--------|--------|--------|--------|--------|--------|--------|---|--------|----|---|---|--------|-----|--------|
| (2)*   *EBITDA is  a non-GAAP measure. See *Section 11.1  Earnings before interest, taxes, depreciation and amortization (EBITDA).* |       |

 

**Trends**

 

The consolidated revenue trend continues toreflect both growth in wireless network revenues generated from an increasingsubscriber base, as well as strong growth in wireline data revenue, whichincludes new revenues from two January 2008 acquisitions. In 2008,wireless average revenue per subscriber unit per month (ARPU) decreased by 1%from 2007, as declining voice ARPU more than offset strong growth in data ARPU.The voice ARPU decline reflects pricing competition, increased use of in-bucketor included-minute service plans, and the recent launch of the postpaid basicbrand. TELUS’ Mike service has a significant exposure to the transport,construction, automotive and oil and gas sectors, which have been affected bythe economic downturn in 2008, resulting in a weakening in Mike ARPU,particularly later in the year.

 

Prior to 2008, wireline data revenue growth was fully offset bydeclining wireline voice local and long distance revenues, due to substitutionfor wireless and Internet services, as well as competition from VoIP serviceproviders, resellers and facilities-based competitors. Residential networkaccess line losses continue at recent run rate levels, as TELUS’ main cable-TVcompetitor expanded its product offerings, competitive pricing and coverage.Partially offsetting the residential line losses were continued gains inbusiness network access lines.

 

Historically, there has been significant fourth quarter seasonalitywith respect to higher wireless subscriber additions, related acquisition costsand equipment sales, resulting in lower fourth quarter wireless EBITDA. Thethird quarter is becoming more significant as well, with back-to-school offers.Historically, there was a less pronounced fourth quarter seasonal effect forwireline high-speed Internet subscriber additions and related costs, which isno longer significant.

 

Starting in 2008, consolidated Operations expense includes expensesfrom two January acquisitions. Beginning with the first quarter of 2007,Operations expenses include expenses or recoveries for introducing a net-cash settlement feature for share optionawards granted prior to 2005.

 

Depreciation expense increased beginning in the second half of 2007with a reduction in estimateduseful service lives for certain circuit switching, network management andother assets in the third and fourth quarters of 2007 and first quarter of 2008.

 

Amortization of intangible assets in the fourth quarter of 2008 andfirst quarter of 2007 is net of investment tax credits of $6 million and$5 million, respectively. The investment tax credits were each appliedfollowing a determination of eligibility by a government tax authority andrelate to assets capitalized in prior years that are now fully amortized.Amortization increased by $18 million beginning in the second quarter of2007 from a major new wireline billing and client care platform put intoservice for Alberta residential customers in March 2007. The sequentialincrease in amortization of intangible

 

25

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assets in the first quarter of 2008 was due mainly to acquisitions.Implementation of the new phase of the billing platform for B.C. residentialcustomers in mid-July 2008 increased amortization in the third quarter of2008 by $5 million and an additional $3 million in the fourth quarterof 2008.

 

Financing costs shown in the preceding table are net of varying amountsof interest income, including interest from the settlement of prior years’income tax-related matters, particularly in the third quarter of 2007. Interestexpenses had been trending lower due primarily to a lower effective interestrate from financing activities in the first half of 2007 and April 2008.An increase in interest expenses in the third and fourth quarters of 2008resulted from a higher debt balance that helped fund January acquisitionsand the payment for advanced wireless services spectrum licences.

 

The trends in Net income and earnings per share (EPS) reflect the itemsnoted above, as well as adjustments arising from legislated income tax changes,settlements and tax reassessments for prior years, including any relatedinterest on reassessments. EPS has been positively impacted by decreased sharesoutstanding from ongoing share repurchases.

 
| **Income tax-related adjustments********($ in millions, except EPS amounts)** | ** ** | **2008 Q4** | ** ** | **2008 Q3** | ** ** | **2008 Q2** | ** ** | **2008 Q1** | ** ** | **2007 Q4** | ** ** | **2007 Q3** | ** ** | **2007 Q2** | ** ** | **2007 Q1** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                                                                             |       |             |       |             |       |             |       |             |       |             |       |             |       |             |       |             |       |
| Approximate  Net income impact                                                                                   | ** ** | **32**           |       | —           |       | —           |       | 17               |       | 143              |       | 93               |       | 17               |       | 4                |       |
| Approximate  EPS impact                                                                                          | ** ** | **0.10**         |       | —           |       | —           |       | 0.05             |       | 0.44             |       | 0.28             |       | 0.05             |       | 0.01             |       |
| Approximate  basic EPS excluding tax-related impacts                                                             | ** ** | **0.80**         |       | 0.89             |       | 0.83             |       | 0.85             |       | 0.79             |       | 0.96             |       | 0.71             |       | 0.57             |       |

 

In addition to income tax-related adjustments, unfavourable adjustmentsfor sales tax reassessments for prior years were recorded in the third quarterof 2008 and second quarter of 2007. The after-tax adjustments wereapproximately $8 million (two cents per share) in the third quarter of2008, and approximately $7 million (two cents per share) in the secondquarter of 2007.

 

**Fourth quarter**

 

Management’s review of operations contained in TELUS’ fourth quarternews release on February 13, 2009, discussed fourth quarter results inmore detail. The following summarizes changes in the fourth quarter operatingresults in 2008, as compared to 2007.

 

Operating revenues increased by $124 million, or 5%, in the fourthquarter of 2008 when compared to the same period in 2007 as a result of 7%growth in wireless revenue and 4% growth in wireline revenue. Operating incomeadjusted to exclude the net-cash settlement feature increased by$2 million in the fourth quarter of 2008 when compared to 2007, primarilydue to lower depreciation expenses, net of $17 million lower wirelineEBITDA (as adjusted) and increased amortization of software assets. Incomebefore income taxes (as adjusted) decreased by $12 million in the fourthquarter of 2008 when compared to 2007 due to lower operating income (asadjusted) and higher net financing costs.

 

Net income decreased by $115 million or 33 cents per share(basic) in the fourth quarter of 2008, when compared to the same period in2007. The decrease included lower net income tax recoveries and relatedinterest of $111 million (34 cents per share). Net income before incometax-related adjustments decreased by $4 million.

 
| **Net income changes********($ millions)**                  | ** ** | **Fourth quarters  ended December 31** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                       |       |                                                  |       |
| Net income  in 2007                                                        |       | 400                                                   |       |
| Deduct  favourable income tax-related adjustments in 2007                  |       | (143                                                  | )          |
|                                                                       |       | 257                                                   |       |
| Tax-effected  changes:                                                     |       |                                                  |       |
| Lower  net-cash settlement feature expense                                 |       | 1                                                     |       |
| Lower EBITDA  as adjusted (1)                                              |       | (12                                                   | )          |
| Lower  depreciation and amortization (1), excluding investment tax credits |       | 9                                                     |       |
| Interest  expenses (1)                                                     |       | (8                                                    | )          |
| Other                                                                      |       | 6                                                     |       |
|                                                                       |       | 253                                                   |       |
| Favourable  income tax-related adjustments in 2008                         |       | 32                                                    |       |
| **Net  income in 2008**                                                    | ** ** | **285**                                               | ** ** |

 

----

(1)  Forthe purposes of this presentation, the 2008 blended statutory tax rate wasused.

 

Cash provided by operating activities decreased by $71 million inthe fourth quarter of 2008 when compared to 2007, primarily due to lowerrecoveries of income taxes and related interest, partly offset by an increasein proceeds from securitized accounts receivable. Cash used by investingactivities increased by $171 million in the fourth quarter of 2008 whencompared to 2007, primarily due to higher capital expenditures.

 

26

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**Net cash used by financing activities decreased by$191 million in the fourth quarter of 2008 when compared to the sameperiod in 2007, as fewer shares were repurchased under NCIB programs and thedividend for the fourth quarter of 2008 was remitted on the January 2,2009 payment date (while the dividend for the fourth quarter of 2007 wasremitted on December 31, 2007 for the January 1, 2008 payment date).**

 

### **5.3 Consolidated results from operations**

 
| **($ in millions, except EBITDA margin and** | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **employees)**                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                       |       |                                       |       |   |   |   |   |
| Operating  revenues                                                        | ** ** | **9,653**                                  |       | 9,074 |   | 6.4 | % |
| Operations  expense                                                        | ** ** | **5,815**                                  |       | 5,465 |   | 6.4 | % |
| Restructuring  costs                                                       | ** ** | **59**                                     |       | 20 |   | 195 | % |
| EBITDA (1)                                                                 | ** ** | **3,779**                                  |       | 3,589 |   | 5.3 | % |
| Depreciation                                                               | ** ** | **1,384**                                  |       | 1,355 |   | 2.1 | % |
| Amortization  of intangible assets                                         | ** ** | **329**                                    |       | 260 |   | 27 | % |
| Operating  income                                                          | ** ** | **2,066**                                  |       | 1,974 |   | 4.7 | % |
|                                                                       |       |                                       |       |   |   |   |   |
| Operations  expense (as adjusted) (2)                                      | ** ** | **5,815**                                  |       | 5,296 |   | 9.8 | % |
| EBITDA (as  adjusted) (2)                                                  | ** ** | **3,779**                                  |       | 3,758 |   | 0.6 | % |
| Operating  income (as adjusted) (2)                                        | ** ** | **2,066**                                  |       | 2,143 |   | (3.6 | )% |
|                                                                       |       |                                       |       |   |   |   |   |
| EBITDA  margin (%) (3)                                                     | ** ** | **39.1**                                   |       | 39.6 |   | (0.5 | )pts |
| EBITDA  margin (as adjusted) (%) (3)                                       | ** ** | **39.1**                                   |       | 41.4 |   | (2.3 | )pts |
|                                                                       |       |                                       |       |   |   |   |   |
| Total full-time  equivalent (FTE) employees                                | ** ** | **35,900**                                 |       | 33,400 |   | 7.5 | % |

 

----

| (1) | EBITDA  is a non-GAAP measure. See *Section 11.1 Earnings before interest, taxes, depreciation  and amortization (EBITDA).* |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excluding  net-cash settlement feature expense of $169 million in 2007.                                                     |
| (3) | EBITDA  or EBITDA (as adjusted) divided by Operating revenues.                                                                   |

 

The following discussion is for the consolidatedresults of TELUS. Segmented discussion is provided in *Section 5.4 Wireline segment results,**Section 5.5 Wireless segment results*and *Section 7.2Cash used by investing activities — capital expenditures**.*

 

**Operating revenues**

 

Operating revenues increased by $579 million in 2008 when comparedto 2007. Revenue and subscriber growthcontinued in 2008 in wireless operations and wireline data services. Wirelinedata revenue was also positively impacted by two acquisitions completed in January 2008.Voice long distance revenue continued to erode, while voice local revenueshowed a year-over-year decrease due to the effects of local competition andtechnological substitution.

 

**Operations expense**

 

Operations expense for 2008 increased by $350 million whencompared to 2007. Operations expense adjusted to exclude the net-cashsettlement feature increased by $519 million. Wireline expense increaseswere due to acquisitions, increased cost of sales, and initial implementationcosts for new wireline enterprise customers, partly offset by the absence ofpost-conversion expenses recorded in 2007 for a new Alberta wireline billingand client care platform. Wireless expenses increased to support the 10%year-over-year growth in the wireless subscriber base and 9% growth in wirelessnetwork revenue, and included support costs for growing data service adoptionand start-up costs associated with the launch of the new Koodo brand. Expenseincreases in both segments were net of lower accrued year-end employeeperformance bonuses resulting from below plan operational performance.Full-time equivalent employees increased by 2,500, mainly due to an increase of1,300 wireline staff in business process outsourcing services for customers,and 1,100 from the January acquisition of Emergis, net of a reduction of400 in other wireline operations. Wireless FTE employees increased by 500 tosupport its subscriber growth.

 

TELUS’ defined benefit pension plan net amortization did not changesignificantly in 2008. In 2009, management expects the net expense for, andcontributions to, defined benefits plans to increase. See assumptions for 2009in *Section 1.5 Financial and operating targetsfor 2009*. Bad debt expense increased by $28 million in 2008,due to growing and broadening subscriber bases.

 

**Restructuring costs**

 

Restructuring costs increased by $39 million in 2008 when comparedto 2007. Restructuring expenses in 2008were in respect of approximately 35 efficiency initiatives, which included areorganization of three enabling business units (Technology strategy, Networkoperations, and Business transformation) into two integrated teams, redirectionof resources to growing parts of the business, optimization of layers ofmanagement and spans of control to reduce staff, increased use of businessprocess outsourcing, rationalization of products in low-value activities,re-alignment of sales forces, simplification of marketing strategies, andconsolidation of vendor management. An expense between $50 million to$75 million is expected for efficiency initiatives in 2009.

 

27

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**EBITDA**

 

Consolidated EBITDA increased by$190 million in 2008 when compared to 2007. Excluding the net-cashsettlement feature, consolidated EBITDA (as adjusted) increased by$21 million, as a $75 million increase in wireless EBITDA (asadjusted) more than offset the $54 million decrease in wireline EBITDA (asadjusted).

 

**Depreciation**

 

Depreciation increased by $29 million in 2008 when compared to2007. The increase resulted from a reduction in estimated useful service livesfor certain digital circuit switching assets in 2008, partly offset by$67 million in accelerated depreciation recorded in 2007 to reflect areduction in estimated useful service lives for certain digital remote circuitswitching, network management and other assets.

 

**Amortization of intangible assets**

 

Amortization increased by$69 million in 2008 when compared to 2007. The increase included: (i) $51 millionfor January 2008 acquisitions (primarily software amortization); (ii) $13 millionfor the July 2008 implementation of the converged wireline billing andclient care platform in B.C.; (iii) $19 million of additionalamortization in 2008 arising from the Alberta implementation of the newwireline billing and client care platform put into service in March 2007;and (iv) net increases in other intangible assets subject to amortization.The increases were partly offset by lower amortization of wireless subscriberbase assets, which are now fully amortized, as well as accelerated amortizationin 2007 related to the discontinuation of AMP’D Mobile Canada services.

 

In addition, amortization wasreduced through application of investment tax credits (ITCs) of $6 millionin 2008 and $5 million in 2007. The ITCs were applied followingdetermination of eligibility by the taxation authority, and were for assetscapitalized in prior years that were fully amortized.

 

Amortization is expected toincrease for the full year of 2009 as compared to 2008, mainly due to anadditional seven months amortization for the B.C. phase of the convergedwireline client care and billing platform. See *Cautionregarding forward-looking statements*.

 

Annual testing for impairment ofintangible assets with indefinite lives and goodwill was conducted in December.It was determined that there were no impairments. See *Section 8.1Critical accounting estimates — Capital assets and Goodwill*.

 

**Operating income**

 

Operating income increased by$92 million in 2008 when compared to 2007. Operating income adjusted toexclude the net-cash settlement feature in 2007 decreased by $77 million,as increased depreciation and amortization more than offset higher EBITDA (asadjusted).

 

**Other income statement items**

 
| **Other expense, net** | ** ** | **Years ended December 31** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                       |       | ** **                                 |       |   |   |   |   |
| ** **                       |       | **36**                                     |       | 36 |   | — | % |

 

Other expense includes accountsreceivable securitization expense, income (losses) or impairments in equity orportfolio investments, gains and losses on disposal of real estate, andcharitable donations. Accounts receivable securitization expenses were$11 million in 2008 as compared to $21 million in 2007. The decreasereflected lower proceeds from securitized accounts receivable (see *Section 7.6Accounts receivable sale*).  Net losses on investments were $10 million in 2008. In 2007, a$12 million write-off of an equity investment in AMP’D Mobile, Inc.was largely offset by other net gains. In addition, approximately$4 million was recorded in 2007 for various costs of assessing whether toacquire BCE, which ultimately led to the decision to not bid for BCE.Charitable donations were $17 million in 2008 and $16 million in2007.

 
| **Financing costs**                                      | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                          |       |                                       | ** ** |   |   |   |   |
| Interest on  long-term debt, short-term obligations and other | ** ** | **481**                                    | ** ** | 464 |   | 3.7 | % |
| Foreign  exchange (gains) losses                              | ** ** | **(1**                                     | **)**      | 13 |   | n.m. |   |
| Capitalized  interest during construction                     | ** ** | **(3**                                     | **)**      | — |   | — |   |
| Interest  income                                              | ** ** | **(14**                                    | **)**      | (37 | ) | 62 | % |
| ** **                                                    |       | **463**                                    |       | 440 | ** ** | 5.2 | % |

 

Interest expenses on long-termand short-term debt and other increased by $17 million in 2008 whencompared to 2007, mainly due to a higher debt balance used to financeacquisitions and pay for AWS spectrum licences, partly offset by a lowereffective interest rate. An adjustment recorded in 2007 for application of theeffective rate method for issue costs

 

28

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required under CICA Handbook Section 3855(recognition and measurement of financial instruments) also contributed to theincrease in 2008.

 

Interest income decreased by$23 million in 2008 when compared to 2007, mainly due to lower interestfrom tax settlements and lower average temporary investment and bank balancesin 2008.

 

   

 
| **Income taxes**                                                                                         | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                                                          |       |                                       | ** ** |   |   |   |   |
| Basic  blended federal and provincial tax at statutory income tax rates                                       | ** ** | **486**                                    | ** ** | 503 |   | (3.4 | )% |
| Revaluation  of future income tax liability to reflect future statutory income tax rates                      | ** ** | **(41**                                    | **)**      | (177 | ) | — |   |
| Tax rate  differential on, and consequential adjustments from, reassessments of prior  years’ tax issues | ** ** | **(21**                                    | **)**      | (79 | ) | — |   |
| Share option  award compensation                                                                              | ** ** | **6**                                      | ** ** | (4 | ) | — |   |
| Other                                                                                                         | ** ** | **6**                                      | ** ** | (10 | ) | — |   |
| ** **                                                                                                    |       | **436**                                    | ** ** | 233 |   | 87 | % |
|                                                                                                          |       |                                       | ** ** |   |   |   |   |
| Blended  federal and provincial statutory tax rates (%)                                                  | ** ** | **31.0**                                   | ** ** | 33.6 |   | (2.6 | )pts |
| Effective  tax rates (%)                                                                                      | ** ** | **27.8**                                   |       | 15.6 |   | 12.2 | pts |

 

Blended statutory income taxesdecreased in 2008 due to lower blended statutory tax rates, partly offset bythe 5% increase in income before taxes. A 1% reduction in B.C. provincialincome tax rates beginning July 1, 2008 was substantively enacted in thefirst quarter of 2008. Previous reductions to federal income tax rates for 2008to 2012 were enacted in 2007. The effective tax rates in both years were lowerthan the statutory tax rates due to revaluations of future income taxliabilities resulting from enacted reductions to future provincial and federalincome tax rates, future tax rates being applied to temporary differences, andreassessments of prior years’ tax matters.

 

Income taxinstalment payments were $14 million in 2008 ($10 million net of taxrefunds received). Based on the assumption of the continuation of the rate ofthe Company’s earnings, the existing legal entity structure, and no substantivechanges to tax regulations, TELUS expects net income tax payments to increasesubstantially in 2009, in respect of final 2008 tax year remittances and 2009instalments. See *Section 1.5 Financial and operatingtargets for 2009*.

 
| **Non-controlling interests** | ** ** | **Years ended December 31** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| ** **                         |       | **3**                                      |       | 7 |   | (57 | )% |

 

Non-controllinginterests represents minority shareholders’ interests in small subsidiaries.

 

29

----

 

 

 

**Comprehensive income**

 

Currently, the concept ofcomprehensive income for purposes of Canadian GAAP, in the Company’s specificinstance, is primarily to include changes in shareholders’ equity arising fromunrealized changes in the fair values of financial instruments*.* The calculation of earnings per share is based on Netincome and Common Share and Non-Voting Share income, as required by GAAP.

 

### **5.4 Wireline segment results**

 
| **Operating revenues — wireline segment** | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                               |       |                                       |       |   |   |   |   |
| Voice local                                                        | ** ** | **1,973**                                  |       | 2,064 |   | (4.4 | )% |
| Voice long  distance (1)                                           | ** ** | **700**                                    |       | 715 |   | (2.1 | )% |
| Data (2)                                                           | ** ** | **2,072**                                  |       | 1,772 |   | 17 | % |
| Other                                                              | ** ** | **276**                                    |       | 259 |   | 6.6 | % |
| External  operating revenue (3)                                    | ** ** | **5,021**                                  |       | 4,810 |   | 4.4 | % |
| Intersegment  revenue                                              | ** ** | **131**                                    |       | 114 |   | 15 | % |
| Total  operating revenues(3)                                       | ** ** | **5,152**                                  |       | 4,924 |   | 4.6 | % |

 

----

| (1) |   | Voice long distance revenue decreased by 4% in 2008 when the impact of  a second quarter 2007 adjustment, associated with the Alberta billing system  conversion, is excluded.                                |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Data revenue increased by approximately 6% in 2008, when revenues from  acquisitions are excluded from 2008 and the impact of mandated retroactive  competitor price reductions are excluded from both years. |
| (3) |   | External and total operating revenue growth was essentially flat in  2008, when excluding revenues from acquisitions and regulatory adjustments.                                                              |

 

Wireline segment revenuesincreased by $228 million in 2008 when compared to 2007, due to thefollowing:

 

·      Voice local revenue decreased by$91 million. The decrease was mainly due to: (i) lower revenues frombasic access and optional enhanced services caused by increased competition forresidential subscribers and consequent decline in local residential accesslines, offset in part by growth in business local services and access lines;and (ii) lower recoveries from the price cap deferral account.

 

The 2007 deferral accountrecovery of approximately $14.5 million included previously incurredamounts associated with mandated local number portability and start-up costs,and it offset unfavourable mandated retroactive rate adjustments in the same period for basic data revenue pursuant totwo CRTC regulatory decisions (see the discussion for wireline data revenuebelow).

 

30

----

 
| **Network access lines (NALs)** | ** ** | **As at December 31** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| **(000s)**                                     | ** ** | **2008**                             | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                           |       |                                 |       |   |   |   |   |
| Residential  NALs                              | ** ** | **2,402**                            |       | 2,596 |   | (7.5 | )% |
| Business  NALs                                 | ** ** | **1,844**                            |       | 1,808 |   | 2.0 | % |
| Total NALs                                     | ** ** | **4,246**                            |       | 4,404 |   | (3.6 | )% |

 
| ** **                  | ** ** | **Years ended December 31** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| **(000s)**                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                        |       |                                       |       |   |   |   |   |
| Change in  residential NALs | ** ** | **(194**                                   | **)**      | (179 | ) | (8.4 | )% |
| Change in  business NALs    | ** ** | **36**                                     | ** ** | 35 |   | 2.9 | % |
| Change in  total NALs       | ** ** | **(158**                                   | **)**      | (144 | ) | (9.7 | )% |

 

Residential line losses reflectthe effect of increased competition from resellers and VoIP competitors(including cable-TV companies), as well as technological substitution towireless services. The increase in business lines was experienced in Ontarioand Quebec urban areas.

 

·      Voice long distance revenues decreased by$15 million in 2008 when compared to 2007. The decrease was partly offsetby a $13 million negative one-time adjustment in the second quarter of2007, associated with implementation of a new billing platform for Albertaresidential customers. Excluding the one-time adjustment in 2007, revenuedecreased by $28 million, due mainly to lower average per-minute ratesresulting from industry-wide price competition and a lower base of residentialsubscribers, partly offset by higher minute volumes.

 

·      Wireline data revenues increased by$300 million in 2008 when compared to 2007. Data revenue increasedprimarily due to: (i) revenues from two acquisitions in January 2008;(ii) increased Internet, enhanced data and hosting service revenues fromgrowth in business services and high-speed Internet subscribers; (iii) increasedbroadcast, videoconferencing and data equipment sales; (iv) mandatoryretroactive rate reductions recorded in 2007 (as noted in the next paragraph);and (v) increased provision of digital entertainment services to consumersin urban incumbent markets. The underlying growth in 2008, absent acquisitionsand regulatory adjustments, was approximately 6%.

 

Pursuant to CRTC Decision 2007-6(relating to digital network access link charges) and CRTC Decision 2007-10(relating to basic service extension feature charges), retroactive ratereductions totalling approximately $11 million in basic data servicesrevenues were recorded in the first quarter of 2007.

 
| **Internet subscribers**    | ** ** | **As at December 31** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| **(000s)**                       | ** ** | **2008**                             | ** ** | **2007** | ** ** | **Change** | ** ** |
|                             |       |                                 |       |   |   |   |   |
| High-speed  Internet subscribers | ** ** | **1,096**                            |       | 1,020 |   | 7.5 | % |
| Dial-up  Internet subscribers    | ** ** | **124**                              |       | 155 |   | (20 | )% |
| Total  Internet subscribers      | ** ** | **1,220**                            |       | 1,175 |   | 3.8 | % |

 
| ** **                               | ** ** | **Years ended December 31** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| **(000s)**                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                     |       |                                       |       |   |   |   |   |
| High-speed  Internet net additions       | ** ** | **76**                                     | ** ** | 103 |   | (26 | )% |
| Dial-up  Internet net reductions         | ** ** | **(31**                                    | **)**      | (39 | ) | 21 | % |
| Total  Internet subscriber net additions | ** ** | **45**                                     | ** ** | 64 |   | (30 | )% |

 

High-speedInternet subscriber net additions were lower in 2008 when compared to the sameperiod in 2007, due to a maturing market and a cable-TV competitor’s expandedproduct offerings.

 

·      Other revenue increased by $17 million in2008 when compared to 2007. The increase was due primarily to higher voiceequipment sales, net of 2007 recoveries for quality of service rate rebatesfollowing CRTC decisions that clarified the application of such rebate rules toTELUS.

 

·      Intersegment revenue represents servicesprovided by the wireline segment to the wireless segment. These revenues areeliminated upon consolidation together with the associated expense in thewireless segment.

 

31

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| **Operating expenses — wireline segment**                       | ** ** | **Years ended December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions,  except employees)**                                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                                     |       |                                       |       |   |   |   |   |
| Salaries,  benefits and other employee-related costs, before net-cash settlement feature | ** ** | **1,853**                                  |       | 1,729 |   | 7.2 | % |
| Net-cash  settlement feature expense                                                     | ** ** | **—**                                 |       | 145 |   | (100 | )% |
| Other  operations expenses                                                               | ** ** | **1,474**                                  |       | 1,348 |   | 9.3 | % |
| Operations  expense                                                                      | ** ** | **3,327**                                  |       | 3,222 |   | 3.3 | % |
| Restructuring  costs                                                                     | ** ** | **51**                                     |       | 19 |   | 168 | % |
| Total  operating expenses                                                                | ** ** | **3,378**                                  |       | 3,241 |   | 4.2 | % |
|                                                                                     | ** ** | ** **                                 |       |   |   |   |   |
| Operations  expense (as adjusted) (1)                                                    | ** ** | **3,327**                                  |       | 3,077 |   | 8.1 | % |
| Total  operating expenses (as adjusted) (1) (2)                                     | ** ** | **3,378**                                  |       | 3,096 |   | 9.1 | % |
|                                                                                     | ** ** | ** **                                 |       |   |   |   |   |
| Wireline FTE  employees (3)                                                              | ** ** | **27,700**                                 |       | 25,700 |   | 7.8 | % |

 

----

| (1) | Excluding  net-cash settlement feature expense.                                                                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Total  operating expenses (as adjusted), excluding acquisitions in 2008, increased  by approximately 4%.                                                                                                                                                                   |
| (3) | FTE  employees include TELUS International FTE employees (8,000 in 2008 and 6,700  in 2007) and Emergis FTE employees (1,100 in 2008 as a result of the January  acquisition). Excluding TELUS International and Emergis FTEs, the change was  a reduction of 400 or 2.1%. |

 

Total operating expensesexcluding the net-cash settlement feature expense increased by$282 million in 2008 when compared to 2007, mainly due to acquisitions,increased cost of sales, base compensation increases in the first quarter, andinitial costs incurred to implement services for new enterprise customers.These increases were partly offset by a reduction of year-end employee performancebonuses in the fourth quarter reflecting below plan operational performance,and absence in 2008 of billing system post-conversion expenses recorded in thesecond and third quarters of 2007. The 2007 system post-conversion expensestotalled $24 million for temporary labour to perform system fixes andmaintain service levels after implementation of the wireline billing and clientcare platform in Alberta.

 

·      Salaries, benefits and employee-related costsincreased by $124 million in 2008 when compared to 2007. The increaseresulted from Emergis operations acquired in January 2008 andimplementation of new services for enterprise customers, as well as base compensationincreases earlier in the year, partly offset by a reduction of year-endemployee performance bonuses in the fourth quarter, as well as efficiencyinitiatives targeting discretionary employee-related expenses such as travel inthe latter part of the year.

 

·      Other operations expenses increased by$126 million in 2008 when compared to 2007. The increase was due to: (i) highercosts of sales for increased data equipment sales with lower margins; (ii) expensesin acquired companies; (iii) higher costs for the provision of digitalentertainment services; (iv) higher U.S. and international transit andtermination costs in the fourth quarter due to a lower Canadian dollar; and (v) higheroff-net facility costs to support new enterprise customers. These increases werepartly offset by higher capitalized labour and lower advertising andpromotional costs. Capitalized labour costs increased in parallel with higherwireline capital expenditures. Due to a successful conversion of B.C.residential subscribers to the converged wireline billing platform in 2008,conversion costs did not have the extra system post-conversion expensesrequired in 2007 for implementing the wireline billing and client care platformin Alberta.

 

·      Restructuring costs increased by$32 million in 2008 when compared to 2007 and were for a number ofinitiatives under the Company’s competitive efficiency program.

 
| **EBITDA ($ millions) and EBITDA margin (%)** | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **wireline segment**                                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                        |       |                                       |       |   |   |   |   |
| EBITDA                                                                      | ** ** | **1,774**                                  |       | 1,683 |   | 5.4 | % |
| EBITDA (as  adjusted) (1) (2)                                          | ** ** | **1,774**                                  |       | 1,828 |   | (3.0 | )% |
| EBITDA  margin                                                              | ** ** | **34.4**                                   |       | 34.2 |   | 0.2 | pts |
| EBITDA  margin (as adjusted)                                                | ** ** | **34.4**                                   |       | 37.1 |   | (2.7 | )pts |

 

----

(1)    Excluding net-cash settlement feature expenseof $145 million in 2007.

(2)    EBITDA (as adjusted), excluding acquisitions in2008, decreased by approximately 5%.

 

Wireline segment EBITDAincreased by $91 million in 2008 when compared to 2007, mainly due to thenet-cash settlement feature expense recorded in 2007. Wireline EBITDA (asadjusted) decreased by $54 million due to increased restructuring charges,lower margins on increased dataequipment sales, initial costs to implement services for new enterprisecustomers, and higher costs for the provision of digital entertainmentservices.

 

The EBITDA margin increase for2008 resulted mainly from the significant net-cash settlement feature expenserecorded in 2007. EBITDA margin (as adjusted) decreased due to early stageexpenses for implementing large complex deals, as well as lower incremental marginson growing data services and higher restructuring charges.

 

32

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### **5.5 Wireless segment results**

 
| **Operating revenues — wireless segment** | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                               |       |                                       |       |   |   |   |   |
| Network  revenue                                                   | ** ** | **4,369**                                  |       | 4,008 |   | 9.0 | % |
| Equipment  revenue                                                 | ** ** | **263**                                    |       | 256 |   | 2.7 | % |
| External  operating revenue                                        | ** ** | **4,632**                                  |       | 4,264 |   | 8.6 | % |
| Intersegment  revenue                                              | ** ** | **28**                                     |       | 27 |   | 3.7 | % |
| Total  operating revenues                                          | ** ** | **4,660**                                  |       | 4,291 |   | 8.6 | % |

 
| **Key wireless operating indicators** | ** ** | **As at December 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| **(000s)**                                           | ** ** | **2008**                             | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                 |       |                                 |       |   |   |   |   |
| Subscribers  — postpaid                         |       | 4,922                                |       | 4,441 |   | 11 | % |
| Subscribers  — prepaid                          |       | 1,207                                |       | 1,127 |   | 7.1 | % |
| Subscribers  — total                            |       | 6,129                                |       | 5,568 |   | 10 | % |
|                                                 |       |                                 |       |   |   |   |   |
| Proportion of subscriber base that is postpaid (%)   |       | 80.3                                 |       | 79.8 |   | 0.5 | pts |
| Digital POPs(1) covered (millions)(2)           |       | 32.6                                 |       | 31.6 |   | 3.2 | % |

 
| ** **                                              | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                    |       |                                       |       |   |   |   |   |
| Subscriber  gross additions — postpaid             |       | 1,062                                      |       | 850 |   | 25 | % |
| Subscriber  gross additions — prepaid              |       | 593                                        |       | 584 |   | 1.5 | % |
| Subscriber  gross additions — total                |       | 1,655                                      |       | 1,434 |   | 15 | % |
|                                                    |       |                                       |       |   |   |   |   |
| Subscriber  net additions — postpaid               |       | 481                                        |       | 365 |   | 32 | % |
| Subscriber  net additions — prepaid                |       | 80                                         |       | 150 |   | (47 | )% |
| Subscriber  net additions — total (3)              |       | 561                                        |       | 515 |   | 8.9 | % |
|                                                    |       |                                       |       |   |   |   |   |
| Subscriber  net additions — total adjusted (3)     |       | 588                                        |       | 515 |   | 14 | % |
|                                                    |       |                                       |       |   |   |   |   |
| ARPU ($) (4)                                            |       | 62.73                                      |       | 63.56 |   | (1.3 | )% |
|                                                    |       |                                       |       |   |   |   |   |
| Churn, per  month (%)(3)(4)                             |       | 1.57                                       |       | 1.45 |   | 0.12 | pts |
| Adjusted  churn, per month (%)(3)                       |       | 1.52                                       |       | 1.45 |   | 0.07 | pts |
|                                                    |       |                                       |       |   |   |   |   |
| COA (5) per gross subscriber addition ($) (4)      |       | 346                                        |       | 395 |   | (12 | )% |
| Average  minutes of use per subscriber per month (MOU)  |       | 411                                        |       | 404 |   | 1.7 | % |
|                                                    |       |                                       |       |   |   |   |   |
| EBITDA (as  adjusted) (6) to network revenue (%)   |       | 45.9                                       |       | 48.2 |   | (2.3 | )pts |
| Retention  spend to network revenue (4) (%)        |       | 9.1                                        |       | 7.6 |   | 1.5 | pts |
| EBITDA (as adjusted) excluding COA (4) ($millions) |       | 2,579                                      |       | 2,495 |   | 3.4 | % |

 

----

| pts — | percentage points                                                                                                                                                                                                                                                                    |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                 |
| (1)        | POPs is an abbreviation for population. A  POP refers to one person living in a population area, which in whole or substantial  part is included in the coverage areas.                                                                                                              |
| (2)        | Including roaming/resale agreements. At  December 31, 2008, TELUS’ wireless PCS digital population coverage  included expanded coverage of approximately 7.5 million PCS POPs due to  roaming/resale agreements principally with Bell Canada.                         |
| (3)        | Net additions and blended churn for 2008  include the impact of TELUS’ analog network turndown on September 15,  2008. Adjusted subscriber net additions and churn exclude the impact of  27,600 subscriber deactivations resulting from turning down the analog  network. |
| (4)        | See *Section 11.3  Definitions of key wireless operating indicators**.*These  are industry measures  useful in assessing operating performance of a wireless company, but are not  defined under accounting principles generally accepted in Canada and the U.S.                |
| (5)        | Cost of acquisition.                                                                                                                                                                                                                                                                 |
| (6)        | Excluding net-cash settlement feature expense of $24 million in  2007.                                                                                                                                                                                                          |

 

Wireless segment revenuesincreased by $369 million in 2008 when compared to 2007, due to thefollowing:

 

·      Network revenue increased by $361 million,due primarily to strong wireless data revenues and the 10% growth in thesubscriber base over the past year. Wireless data revenues were$690 million in 2008, up 55% from 2007, and now represent 16% of network revenue(11% of network revenue in 2007). Growth in data revenues continues to reflectstrength in text messaging (including incoming text messages) and smartphoneservice revenues driven by increased usage and features, data roaming,migration of existing subscribers to full-function smartphones and EVDO-capablehandsets.

 

Blended ARPU of $62.73 in 2008was down by $0.83 when compared to 2007, as competitive pressures on voicerevenues and strong growth in the basic brand service were largely offset bygrowth in data services. Data ARPU in 2008 was $9.84, up $2.82 or 40% ascompared to 2007. Voice ARPU was $52.89 in 2008, down $3.65 or 6.5% as comparedto 2007. The decrease in voice ARPU was due to pricing competition, lower Mikeservice ARPU, increased use of included-minute rate plans, penetration of thenew basic brand service, and lower voice roaming revenue. This

 

33

----

 

was partially offset by strongfeature upsell, including long distance and calling packages. Lower volumenon-push-to-talk-centric Mike subscribers continue to be actively migrated toPCS smartphones for the enhanced data applications, contributing to futurerevenue growth opportunities.

 

Gross and net subscriberadditions in 2008 include the results of TELUS’ postpaid basic brand firstlaunched in March 2008. Consistent with industry practice, the Companydoes not break out the results for this service for competitive reasons.Despite softening economic conditions, gross subscriber additions in 2008 werea TELUS record 1.66 million, up 15% when compared to 2007. The proportionof postpaid gross additions for 2008 was 64%, up five percentage points whencompared to 2007.

 

Net additions in 2008 (excludingdeactivation of analog subscribers) were 588,000, up 14% from 2007, andincluded 86% postpaid subscribers, up from 71% postpaid subscribers in 2007.

 

Blended churn (excludingdeactivation of analog subscribers) for the full year of 2008 was 1.52%,increasing from 1.45% in 2007. The increase reflected greater competitiveintensity, including the impact of higher prepaid churn, in part due to thegrowth of basic postpaid brands in the market. The blended churn rate includingdeactivation of analog subscribers was 1.57% in the full year of 2008.

 

·      Equipment sales, rental and service revenueincreased by $7 million in 2008 when compared to 2007. Equipment salesincreased due to higher gross subscriber additions and retention volumes, whichwere partly offset by lower per-unit revenues. Lower per-unit revenues were dueto increased promotional activity driving smartphone adoption, including lowerindustry-wide smartphone pricing and penetration of the Koodo brand.

 

·      Intersegment revenues represent servicesprovided by the wireless segment to the wireline segment and are eliminatedupon consolidation along with the associated expense in the wireline segment.

 
| **Operating expenses — wireless segment** | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions,  except employees)**                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                               |       |                                       |       |   |   |   |   |
| Equipment  sales expenses                                          | ** ** | **720**                                    |       | 656 |   | 9.8 | % |
| Network  operating expenses                                        | ** ** | **603**                                    |       | 514 |   | 17 | % |
| Marketing  expenses                                                | ** ** | **470**                                    |       | 439 |   | 7.1 | % |
| General and administration  expenses                               | ** ** | **854**                                    |       | 775 |   | 10 | % |
| Operations expense                                                 | ** ** | **2,647**                                  |       | 2,384 |   | 11 | % |
| Restructuring costs                                                | ** ** | **8**                                      |       | 1 |   | n.m. |   |
| Total operating expenses                                           | ** ** | **2,655**                                  |       | 2,385 |   | 11 | % |
|                                                               |       |                                       |       |   |   |   |   |
| Operations expense (as  adjusted) (1)                              | ** ** | **2,647**                                  |       | 2,360 |   | 12 | % |
| Total operating expenses  (as adjusted) (1)                        | ** ** | **2,655**                                  |       | 2,361 |   | 12 | % |
|                                                               | ** ** | ** **                                 |       |   |   |   |   |
| Wireless FTE employees                                             | ** ** | **8,200**                                  |       | 7,700 |   | 6.5 | % |

 

----

(1)    Excluding net-cash settlementfeature expense of $24 million in 2007.

 

Wireless segment total operatingexpenses increased by $270 million in 2008 when compared to 2007. Totaloperating expenses adjusted to exclude the net-cash settlement featureincreased by $294 million to promote, acquire, support and retain the 10%and 9% year-over-year growth in the subscriber base and Network revenue,respectively.

 

·      Equipment sales expenses increased by$64 million in 2008 when compared to 2007. Higher combined grosssubscriber additions and retention volumes, including smartphone activity, werepartially offset by lower smartphone per-unit costs and sales of the Koodoservice.

 

·      Network operating expenses increased by$89 million in 2008 when compared to 2007. In addition to supporting thelarger subscriber base, the increase was principally in support of the 55%growth in data revenues and was primarily volume in nature, as increased usageand smartphone adoption drove increases in roaming costs, revenue share tothird parties and licensing costs to service providers.

 

·      Marketing expenses increased by$31 million in 2008 when compared to 2007. The increase was primarily dueto higher advertising in support of the 15% increase in gross subscriberadditions, the introduction of a new brand, and the fourth quarter launch ofthe BlackBerry Storm, which had delayed deliveries that negatively impactedgross subscriber additions and COA.

 

COA per gross subscriberaddition decreased by $49 or 12% for 2008, when compared to 2007, due to themix in gross subscriber loading towards lower variable cost channels andefficiency in marketing spend, partly offset by higher subsidies on smartphonesin response to competitor pricing, and handset inventory valuation adjustments.

 

Retention costs as a percentageof network revenue were 9.1% in 2008 as compared to 7.6% for 2007. The increasein retention costs was due primarily to continued handset upgrades tofull-function smartphones to support data revenue growth and the continuedmigration of non-push-to-talk-centric Mike service clients to PCS postpaidservices.

 

34

----

 

·      General and administration expenses increasedby $79 million in 2008 when compared to 2007. General and administrationexpenses adjusted to exclude the net-cash settlement feature increased by$103 million, due to higher costs associated with restructuring efforts,contracted labour costs to support data products and service offerings, growthin the subscriber base, expansion of company-owned retail stores and Koodooutlets, and an increase in bad debt expense. These increases were partlyoffset by a reduction of year-end employee performance bonuses in the fourthquarter from below plan operational performance, as well as efficiencyinitiatives targeting discretionary employee-related expenses such as travel inthe latter part of the year.

 

·      Restructuring costs included severalinitiatives under the Company’s competitive efficiency program.

 
| **Wireless segment**                                                   | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **EBITDA ($ millions) and EBITDA margin (%)** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                        |       |                                       |       |   |   |   |   |
| EBITDA                                                                      | ** ** | **2,005**                                  |       | 1,906 |   | 5.2 | % |
| EBITDA (as  adjusted) (1)                                                   | ** ** | **2,005**                                  |       | 1,930 |   | 3.9 | % |
| EBITDA  margin                                                              | ** ** | **43.0**                                   |       | 44.4 |   | (1.4 | )pts |
| EBITDA  margin (as adjusted)                                                | ** ** | **43.0**                                   |       | 45.0 |   | (2.0 | )pts |

 

----

(1)    Excluding net-cash settlementfeature expense of $24 million in 2007.

 

Wireless segment EBITDAincreased by $99 million in 2008 when compared to 2007, while wirelessEBITDA adjusted to exclude the net-cash settlement feature increased by$75 million. The increase in EBITDA (as adjusted) was due to higherNetwork revenue offset by increased COA expenses (associated with higher grossloading), higher retention spend (continued smartphone and voice upgrades), andincreased network costs related to data usage and outbound roaming activities,as well as higher general and administrative costs to support business growth.

 

EBITDA margin (as adjusted) decreasedmainly due to lower incremental margins on growing data service adoption andhigher retention expenses.

 

35

----

 

## **6.**     Changes in financial position

 

Changes in the Consolidated statements of financialposition for the year ended December 31, 2008, are as follows:

 
| ** **                                              | ** ** | **As at December 31** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|-------------|------------|----------------------------------------------|
| **($ millions)**                                   | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Changes** | ** ** | **Explanation of the change** |
|                                                    |       |                                 |       |       |       |        |       |                                         |   |   |
| **Current Assets**                                      | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| Cash  and temporary investments, net                    | ** ** | **4**                                |       | 20         |       | (16         | )          | (80                                          | )% | See *Section 7:  Liquidity and capital resources* |
| Short-term  investments                                 | ** ** | **—**                           |       | 42         |       | (42         | )          | (100                                         | )% | Liquidation of short-term  investments in the second quarter |
| Accounts  receivable                                    | ** ** | **966**                              |       | 711        |       | 255         |       | 36                                           | % | Mainly due to a  $200 million reduction in proceeds from securitized accounts receivable  and increases related to higher revenues and acquisitions, partly offset by a  faster accounts receivable turnover (approximately 48 days versus 49 days)  and increased provisions for bad debts |
| Income  and other taxes receivable                      | ** ** | **25**                               |       | 121        |       | (96         | )          | (79                                          | )% | Most jurisdictions moved into  a liability position with the current income tax expense recorded in 2008 |
| Inventories                                             | ** ** | **333**                              |       | 243        |       | 90          |       | 37                                           | % | Primarily receipt of new  wireless handset models for new product launches and dealers accepting lower  volumes in the fourth quarter of 2008, as well as a separate line of handsets  for the new basic wireless brand |
| Prepaid  expenses and other                             | ** ** | **220**                              |       | 200        |       | 20          |       | 10                                           | % | Mainly an increase in deferred  wireless customer activation and connection fees associated with subscriber  growth |
| Derivative  assets                                      | ** ** | **10**                               |       | 4          |       | 6           |       | 150                                          | % | Fair value adjustments to  foreign exchange hedges, restricted share units and other operational hedges |
|                                                    | ** ** | ** **                           |       |       |       |        |       |                                         |   |   |
| **Current Liabilities**                                 | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| Accounts  payable and accrued liabilities               | ** ** | **1,465**                            |       | 1,476      |       | (11         | )          | (1                                           | )% | Includes lower accrued payroll  costs from seven fewer year-end payroll days outstanding, and a reduction in  accrued employee performance bonuses, partly offset by increases from  acquisitions |
| Income  and other taxes payable                         | ** ** | **163**                              |       | 7          |       | 156         |       | n.m.                                         |   | Mainly due to current income  tax expense booked during 2008 and income taxes payable from acquisitions,  less instalments paid |
| Restructuring  accounts payable and accrued liabilities | ** ** | **51**                               |       | 35         |       | 16          |       | 46                                           | % | New obligations in 2008  exceeded payments under previous and current programs |
| Dividends  payable                                      | ** ** | **151**                              |       | —     |       | 151         |       | n.m.                                         |   | Dividends payable as at  December 31, 2008 were remitted on the January 2, 2009 payment  date. In 2007, dividends were remitted on December 31 for the  January 1, 2008 payment date |
| Advance  billings and customer deposits                 | ** ** | **689**                              |       | 632        |       | 57          |       | 9                                            | % | Includes an increase in  billings for new enterprise customers and wireless postpaid subscriber  growth, and higher wireless deferred customer activation and connection fees,  net of a reduction in customer deposits |
| Current  maturities of long-term debt                   | ** ** | **4**                                |       | 5          |       | (1          | )          | (20                                          | )% | Primarily a net decrease in  capital leases |
| Current  portion of derivative liabilities              | ** ** | **75**                               |       | 27         |       | 48          |       | 178                                          | % | Fair value adjustments for  share option, restricted share unit and operational hedges, net of options  exercised or forfeited |
| Current  portion of future income taxes                 | ** ** | **459**                              |       | 504        |       | (45         | )          | (9                                           | )% | A decrease in temporary  differences for current assets and liabilities, as well as changes in  partnership taxable income that will be allocated in the next 12 months |
| ** **                                              | ** ** | ** **                           | ** ** |       |       |        |       |                                         |   |   |
| **Working capital****(1)**                              | ** ** | **(1,499**                           | **)**      | (1,345     | )          | (154        | )          | (11                                          | )% | Includes dividends payable at  December 31, 2008, that were paid on January 2, 2009 and income  taxes payable over the next 12 months, net of reduced securitization of  accounts receivable. |

 

----

(1) Currentassets subtracting Current liabilities – an indicator of the ability to financecurrent operations and meet obligations as they fall due.

 

36

----

 

**Changes infinancial position,** continued from the previous page.

 
| ** **                      | ** ** | **As at December 31** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   |
|---------------------------------|------------|--------------------------------------|------------|------------|------------|-------------|------------|----------------------------------------------|
| **($ millions)**           | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Changes** | ** ** | **Explanation of the change** |
|                            |       |                                 |       |       |       |        |       |                                         |   |   |
| **Capital Assets, Net**         | ** ** | **12,483**                           |       | 11,122     |       | 1,361       |       | 12                                           | % | Includes $882 million for  AWS spectrum licences acquired in Industry Canada’s 2008 auction,  $326 million for acquired software, customer contracts and related  customer relationships and other capital assets, as well as capital  expenditures net of depreciation and amortization. See *Section 5.3  Consolidated results from operations – Depreciation*, *Amortization of intangible assets*, as well as *Section 7.2 Cash used by investing activities* |
| ** **                      | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| **Other Assets**                | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| Deferred  charges               | ** ** | **1,513**                            |       | 1,318      |       | 195         |       | 15                                           | % | Primarily related to pension  plan funding, favourable cumulative returns on plan assets to the end of 2007  and continued amortization of transitional pension assets |
| Investments                     | ** ** | **42**                               |       | 39         |       | 3           |       | 8                                            | % | Purchases, revaluations and  sales of small investments, net of the value of Emergis shares purchased in  the open market in December 2007 that were exchanged at the close of  acquisition in January 2008, as well as the sale of a minority stake in  Hostopia |
| Goodwill                        | ** ** | **3,564**                            |       | 3,168      |       | 396         |       | 13                                           | % | Primarily the  January 2008 acquisition of Emergis |
|                            |       |                                 |       |       |       |        |       |                                         |   |   |
| **Long-Term Debt**              | ** ** | **6,348**                            |       | 4,584      |       | 1,764       |       | 38                                           | % | Includes the April 2008  publicly issued $500 million, seven-year Notes, and draws of  $980 million from the 2012 credit facility, partly offset by a reduction  of $155 million in issued commercial paper. Also included is a  $436 million increase in the Canadian dollar value of the 2011 U.S.  dollar Notes, which is largely offset by a lower derivative liability (see  Other Long-Term Liabilities) |
| ** **                      | ** ** | ** **                           |       |       |       |        |       |                                         |   |   |
| **Other Long-Term Liabilities** | ** ** | **1,295**                            |       | 1,718      |       | (423        | )          | (25                                          | )% | Primarily changes in U.S.  dollar exchange rates and a fair value adjustment of the derivative  liabilities associated with 2011 U.S. dollar Notes |
| ** **                      | ** ** | ** **                           |       |       |       |        |       |                                         |   |   |
| **Future Income Taxes**         | ** ** | **1,255**                            |       | 1,048      |       | 207         |       | 20                                           | % | An increase in temporary  differences for long-term assets and liabilities, partly offset by lower tax  rates being applied |
| ** **                      | ** ** | ** **                           |       |       |       |        |       |                                         |   |   |
| **Non-Controlling Interests**   | ** ** | **23**                               |       | 26         |       | (3          | )          | (12                                          | )% | Payment of dividends by a  subsidiary to a non-controlling interest and an increase in the Company’s  total effective economic interest in TELUS International Philippines Inc.  from 97.4% to 100.0%, net of non-controlling interests’ share of earnings |
| ** **                      | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| **Shareholders’ Equity**   | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** ** |
| Common equity                   | ** ** | **7,182**                            |       | 6,926      |       | 256         |       | 4                                            | % | Primarily  Net income of $1,128 million, less dividends declared of  $584 million and NCIB purchases of $280 million |

 

37

----

 

## **7.**     Liquidity and capital resources

 

The Company’s capital management strategies and financing plan resultsand expectations, are described in *Section 4.3*.In the normal course, the Company has generated annual cash flow fromoperations exceeding annual capital investment needed to support businessgrowth and re-investment in technology. In 2008, cash provided by operatingactivities was supplemented by financing activities as the Company made two strategicacquisitions in January (Emergis and Fastvibe) and acquired 59 spectrumlicences in the AWS auction, which ended in July.

 
| ** **                                                  | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                       | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                        |       | ** **                                 | ** ** |   |   |   |   |
| Cash  provided by operating activities                      | ** ** | **2,819**                                  | ** ** | 3,172 |   | (11 | )% |
| Cash (used)  by investing activities                        | ** ** | **(3,433**                                 | **)**      | (1,772 | ) | (94 | )% |
| Cash  provided (used) by financing activities               | ** ** | **598**                                    | ** ** | (1,369 | ) | n.m. |   |
| (Decrease)  increase in cash and temporary investments, net | ** ** | **(16**                                    | **)**      | 31 |   | — |   |
| Cash and  temporary investments, net, beginning of period   | ** ** | **20**                                     | ** ** | (11 | ) | — |   |
| Cash and  temporary investments, net, end of period         | ** ** | **4**                                      | ** ** | 20 |   | (75 | )% |

 

### **7.1Cash provided by operating activities**

 

Cash provided by operatingactivities decreased by $353 million in 2008 when compared to 2007.Changes in 2008 include the following:

 

·      Changes in proceeds from securitizedaccounts receivable (which are included in non-cash working capital changes)contributed a $200 million reduction in cash flow for the full year.Specifically, proceeds were reduced by $200 million in 2008, as comparedto no change in 2007. Utilized proceeds from securitized accounts receivablewere lower in 2008 as other sources of funding were used. See *Section 7.6 Accounts receivable sale*;

 

·      EBITDA increased by$190 million as described in *Section 5: Resultsfrom operations;*

 

·      Share-based compensation expense inexcess of payments decreased by $91 million due to recording of thenet-cash settlement feature expense in 2007 and lower cash outflows resultingfrom fewer option exercises;

 

·      Contributions to employee definedbenefit plans in excess of the net employee defined benefit plans recoveryincreased by $21 million. Net contributions are expected to increase in2009. See assumptions in *Section 1.5 Financialand operating targets for 2009*;

 

·      Interest paid increased by$3 million in 2008 when compared to 2007, due to higher outstanding debtin 2008, partly offset by a lower effective interest rate in 2008 and repaymentof forward starting interest rate swaps in 2007;

 

·      Interest received decreased by$39 million due mainly to receipt of interest on income tax refunds in2007;

 

·      Income tax recoveries received netof instalments paid decreased by $133 million in 2008 when compared to2007, as a result of larger settlements of income tax-related matters in 2007;and

 

·      Other changes in non-cash workingcapital, including (i) liquidation of short-term investments of$42 million in 2008 as compared to liquidations of $68 million in2007, and (ii) increases in inventories, net of increases in advancebillings and customer deposits in 2008.

 

38

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### **7.2Cash used by investing activities**

 

Cash used by investingactivities increased by $1,661 million in 2008 when compared to 2007. Theincrease was due to the $882 million payment for AWS spectrum licences,acquisitions totalling $696 million net of acquired cash, and increasedcapital expenditures.

 

Assets under construction were$682 million at December 31, 2008, up by $123 million from December 31,2007, primarily reflecting a $110 million increase in property, plant andequipment under construction, including construction of the wireless HSPAnetwork. Software intangible assets under construction increased by$13 million over the year, as expenditures in 2008 for the billing platformand other systems exceeded the transfer of $117 million to softwaresubject to amortization resulting from implementation of the British Columbiaphase of the converged wireline billing and client care platform in July.

 
| **Capital expenditures  excluding AWS spectrum licences** | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                          |       |                                       |       |   |   |   |   |
| Wireline  segment                                                             | ** ** | **1,311**                                  |       | 1,219 |   | 7.5 | % |
| Wireless  segment                                                             | ** ** | **548**                                    |       | 551 |   | (0.5 | )% |
| TELUS  consolidated                                                           | ** ** | **1,859**                                  |       | 1,770 |   | 5.0 | % |
|                                                                          |       |                                       |       |   |   |   |   |
| EBITDA (as  adjusted) less capital expenditures (1)                           | ** ** | **1,920**                                  |       | 1,988 |   | (3.4 | )% |

 

----

(1)    See *Section 11.1 EBITDA* for the calculation anddescription.

 

Capital expenditures in 2008increased by $89 million when compared to 2007, and were in line withtargeted annual expenditures of approximately $1.9 billion.

 

·      Wireline segment capitalexpenditures increased by $92 million in 2008 when compared to 2007. Theincrease included investment to support high bandwidth services for businessand residential customers, investment in healthcare and financial servicessolutions, and upfront expenditures to support new enterprise customers, partlyoffset by lower demand in 2008 for network access builds resulting from moremoderate residential construction activity in B.C. and Alberta. Wireline cashflow (EBITDA as adjusted less capital expenditures) was $463 million in2008, a decrease of 24% when compared to 2007. The decrease reflects highercapital expenditure levels and lower EBITDA (as adjusted).

 

·      Wireless segment capitalexpenditures decreased by $3 million in 2008 when compared to 2007.Expenditures in 2008 were relatively flat compared to 2007, as new spending onthe HSPA network build in 2008 was offset by lower expenditures for the CDMA wirelessnetwork (including the EVDO RevA data network roll-out). Wireless cash flow(EBITDA as adjusted less capital expenditures) was $1,457 million in 2008,an increase of 6% when compared to 2007.

 

39

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| **Payment for AWS spectrum licences**                                 | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                                      |       |                                       |       |   |   |   |   |
| Capital  expenditures for AWS spectrum licences                                           | ** ** | **882**                                    |       | — |   | — |   |
|                                                                                      |       |                                       |       |   |   |   |   |
| EBITDA (as  adjusted) less capital expenditures and payment for AWS spectrum licences (1) | ** ** | **1,038**                                  |       | 1,988 |   | (48 | )% |

 

----

(1)    See *Section 11.1 EBITDA* for the calculation anddescription.

 

The Company acquired 59 licencesin Industry Canada’s AWS spectrum auction that concluded in July for$880 million plus auction process charges of $2 million. The amountof successful bids was paid through a combination of drawing on creditfacilities and utilization of cash on hand. Industry Canada advised the Companythat it had met eligibility conditions of the AWS spectrum licences effective December 31,2008. The licences are now classified as intangible assets with indefinitelives. In 2008, EBITDA (as adjusted) less capital expenditures and payment forthe AWS spectrum licences decreased by $950 million. Wireless cash flow in2008, including payment for AWS spectrum, was $575 million, down 58% from2007.

 
| **Capital intensity ****(1)**                                             | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in %)**                                                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                                |       |                                       |       |   |   |   |   |
| Capital  expenditure intensity                                                      | ** ** | **19**                                     |       | 20 |   | (1 | )pt |
| Capital  expenditure intensity, including payment for AWS spectrum licences in 2008 | ** ** | **28**                                     |       | 20 |   | 8 | pts |

 

----

(1)    Capital intensity isthe measure of capital expenditures divided by operating revenues. This measureprovides a basis for comparing the level of capital expenditures to othercompanies of varying size within the same industry.

 

TELUS’ capital expenditureintensity ratio in 2008, excluding payment for spectrum licences, reflectsintensity levels of 25% for wireline and 12% for wireless, consistent withintensity levels of 25% and 13%, respectively, in 2007. Payment for AWSspectrum licences in 2008 temporarily increased TELUS’ overall capitalintensity ratio to 28% and the wireless capital intensity ratio to 31%.

 

### **7.3Cash provided (used) by financing activities**

 

Net cash provided by financingactivities was $598 million in 2008. This compares to net cash used byfinancing activities of $1,369 million in 2007.

 

·      Cashdividends paid to shareholders in 2008 were $433 million in 2008 ascompared to $521 million in 2007. The decrease in dividend paymentsresulted from different remittance dates for dividends declared in the fourthquarter of 2008 and 2007. The fourth quarter dividend for 2008 was remitted onthe January 2, 2009 payment date, while the fourth quarter dividend for2007 was remitted on December 31, 2007 for the January 1, 2008payment date. Otherwise, dividend payments in 2008 reflected higher quarterlydeclared dividend rates (see *Section 5.2 Quarterlyresults summary*), partly offset by lower shares outstanding fromNCIB share repurchase programs.

 

·      The Company purchased 34% of the maximum20 million shares allowed under the fourth NCIB program that ended December 19,2008. Purchases of shares under NCIB programs decreased by $470 million in2008 when compared to 2007, as fewer shares were repurchased at a lower averageprice.

 

The Company renewed its NCIB program, whichhas been in place since December 2004. The renewed program(Program 5) came into effect on December 23, 2008 and is set toexpire on December 22, 2009. The maximum number of shares that may bepurchased under Program 5 is four million Common Shares and four millionNon-Voting Shares. Daily purchases under Program 5 may not exceed 462,444Common Shares and 254,762 Non-Voting Shares until March 31, 2009, andthereafter may not exceed 231,222 Common Shares and 127,381 Non-Voting Shares.The shares are to be purchased on the Toronto Stock Exchange (TSX) and allrepurchased shares will be cancelled. Investors may obtain a copy of the noticefiled with the TSX without charge by contacting TELUS Investor Relations.

 

40

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**Shares repurchased forcancellation under normal course issuer bid programs**

 
| ** **                            | ** ** | **Shares repurchased** | ** ** | **Purchase cost ($ millions)** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **Common  Shares**          | ** ** | **Non-Voting  Shares**                        | ** ** | **Total** | ** ** | **Charged to  Share  capital ****(1)** | ** ** | **Charged to  Retained  earnings****(2)** | ** ** | **Paid** | ** ** |
| 2007                                  |       |                        |       |                                          |       |   |   |   |   |   |   |   |   |
| Program 3  ended Dec. 19         |       | 2,904,900                   |       | 10,571,800                                    |       | 13,476,700 |   | 264 |   | 480 |   | 744 |   |
| Program 4  beginning Dec. 20     |       | —                      |       | 134,200                                       |       | 134,200 |   | 3 |   | 3 |   | 6 |   |
|                                  |       | 2,904,900                   |       | 10,706,000                                    |       | 13,610,900 |   | 267 |   | 483 |   | 750 |   |
| **2008**                              | ** ** | ** **                  | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Program  4 ended Dec. 19**     | ** ** | **950,300**                 | ** ** | **5,810,400**                                 | ** ** | **6,760,700** | ** ** | **137** | ** ** | **143** | ** ** | **280** | ** ** |
| **Program  5 beginning Dec. 23** | ** ** | **—**                  | ** ** | **—**                                    | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| ** **                            | ** ** | **950,300**                 | ** ** | **5,810,400**                                 | ** ** | **6,760,700** | ** ** | **137** | ** ** | **143** | ** ** | **280** | ** ** |

 

----

(1)    Represents the book value of sharesrepurchased.

(2)    Represents the cost in excess of the bookvalue of shares repurchased.

 

Long-term debt issues net of redemptions and repayments were$1,316 million in 2008, resulting from the following:

 

·      In April 2008, the Company publicly issued$500 million 5.95%, Series CE Notes at a price of $998.97 per $1,000of principal. The Notes mature in April 2015. The net proceeds of theoffering were used for general corporate purposes, including repayment ofamounts under the 2012 revolving credit facility, and to refinance short-termfinancing sources, which had been utilized in January for purchase of thethen issued and outstanding Emergis common shares for $743 million. The Series CENotes require that the Company make an offer to repurchase the Notes at a priceequal to 101% of their principal plus accrued and unpaid interest to the dateof repurchase upon the occurrence of a change in control triggering event, asdefined in the supplemental trust indenture.

 

·      On August 6, 2008, the Board of Directorsapproved an increase in the authorized commercial paper program from$800 million to $1.2 billion.

 

·      Amounts drawn on the 2012 bank facility increased to$980 million at December 31, 2008 from $nil one year earlier, whilecommercial paper issues decreased by $155 million during the year.

 

During the first quarter of 2008, the Company increased utilization ofthe 2012 bank facility from $nil to $321 million and increased commercialpaper issues by $213 million for general corporate purposes, includingacquisitions in January. During the second quarter of 2008, the Company reducedthe amount drawn on the 2012 bank facility to $162 million. Utilized bankfacilities increased to $430 million during the third quarter to help payfor the AWS spectrum licences. In the fourth quarter, amounts drawn on the 2012facility increased by $550 million, offsetting a reduction in outstandingcommercial paper. Commercial paper outstanding was $432 million at December 31,2008, as compared to $968 million at September 30, $800 millionat June 30 and March 31, and $587 million at December 31,2007.

 

In comparison, debt financing activities in 2007 included the March issueof Series CC and CD Notes totalling $1 billion, establishment of acommercial paper program in May, and repayment of approximately$1.5 billion of Notes matured in June. These activities contributed to alower effective interest rate in subsequent periods.

 

41

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For theanticipated requirements to meet long-term debt repayments, see TELUS’ 2009financing and capital structure management plan in *Section 4.3*,as well as the Contractual obligations table in *Section 7.8– Commitments and contingent liabilities.*

 

 

### **7.4**Liquidity and capital resource measures

 
| **Liquidity and capital resource measures**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As at, or years ended, December 31**                                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** |
|                                                                                                                        |       |       |       |       |       |       |       |
| **Components  of debt and coverage ratios****(1)**** ($ millions)**                                               |       |       |       |       |       |       |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| Net debt                                                                                                                    | ** ** | **7,286**  |       | 6,141      |       | 1,145      |       |
| Total  capitalization – book value                                                                                     | ** ** | **14,621** |       | 13,197     |       | 1,424      |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| EBITDA –  excluding restructuring costs                                                                                | ** ** | **3,838**  |       | 3,609      |       | 229        |       |
| Net interest  cost                                                                                                          | ** ** | **463**    |       | 440        |       | 23         |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| **Debt  ratios**                                                                                                            |       |       |       |       |       |       |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| Fixed-rate  debt as a proportion of total indebtedness (%)                                                                  | ** ** | **77**     |       | 82         |       | (5         | )pts       |
| Average term  to maturity of debt (years)                                                                                   | ** ** | **4.0**    |       | 5.3        |       | (1.3       | )          |
|                                                                                                                        |       |       |       |       |       |       |       |
| Net debt to  total capitalization (%) (1)                                                                                   | ** ** | **49.8**   |       | 46.5       |       | 3.3        | pts        |
| Net debt to  EBITDA – excluding restructuring costs (1)                                                                | ** ** | **1.9**    |       | 1.7        |       | 0.2        |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| **Coverage  ratios****(1)**                                                                                                 |       |       |       |       |       |       |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| Interest  coverage on long-term debt                                                                                        | ** ** | **4.3**    |       | 4.2        |       | 0.1        |       |
| EBITDA –  excluding restructuring costs interest coverage                                                              | ** ** | **8.3**    |       | 8.2        |       | 0.1        |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| **Other  measures**                                                                                                         |       |       |       |       |       |       |       |
|                                                                                                                        |       |       |       |       |       |       |       |
| Free cash  flow ($ millions) (2)                                                                                       |       |       |       |       |       |       |       |
| - based on  defined benefit plans net recovery                                                                              | ** ** | **567**    |       | 1,573      |       | (1,006     | )          |
| - based on  defined benefit plans contributions                                                                             | ** ** | **361**    |       | 1,388      |       | (1,027     | )          |
|                                                                                                                        |       |       |       |       |       |       |       |
| Dividend  payout ratio of sustainable net earnings guideline – 45 to 55% (1)                                 |       |       |       |       |       |       |       |
| Dividend  payout ratio – actual earnings (%)                                                                           | ** ** | **54**     |       | 47         |       | 7          | pts        |
| Dividend  payout ratio – actual earnings excluding income tax-related adjustments and  net-cash settlement feature (%) | ** ** | **56**     |       | 54         |       | 2          | pts        |

 

----

(1)    See *Section 11.4 Definitions of liquidityand capital resource measures.*

(2)    See *Section 11.2 Free cash flow* for thedefinitions.

 

Netdebt at December 31, 2008 increased from one year earlier mainly due tothe $500 million debt issue in April 2008, $980 million drawn onthe 2012 credit facility and a reduction of $16 million in the cashbalance, net of a $200 million decrease in proceeds from securitizedaccounts receivable and a reduction of $155 million in the amounts ofcommercial paper issued. The net increase in debt supported payment of $882million for AWS spectrum licences in the third quarter and $692 million (net ofacquired cash) for January acquisitions. Total capitalization increasedbecause of higher net debt and retained earnings, partly offset by lower sharecapital due to share repurchases.

 

Theaverage term to maturity of debt of four years at December 31, 2008decreased from 5.3 years at December 31, 2007 due to larger amountsdrawn against the 2012 credit facility, partly offset by the issuance in April 2008of $500 million, Series CE seven-year Notes and lower amounts ofissued commercial paper. The proportion of debt on a fixed-rate basis 

 

42

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decreasedmainly due to amounts drawn against the 2012 credit facility, partly offset bya decrease in proceeds from securitized accounts receivable and the April 2008seven-year Note issue and lower amounts of commercial paper issued.

 

The interestcoverage on long-term debt ratio was 4.3 for 2008, reflecting an increase of0.1 from 2007 (+0.2 from higher income before income taxes and long-terminterest, net of -0.1 from increased long-term interest). The EBITDA interestcoverage ratio of 8.3 for 2008 reflected an increase of 0.1 from 2007 (+0.5from higher EBITDA before restructuring, net of -0.4 from higher net interestcosts).

 

Free cash flowfor 2008, calculated using the net defined benefit plans recovery as reportedpreviously, decreased by $1,006 million when compared to one year earlier,largely due to the $882 million payment for AWS spectrum licences andhigher capital expenditures, as well as lower income tax recoveries andinterest income, partly offset by higher EBITDA after share-based compensationand restructuring payments. Prospectively, the Company has chosen to present freecash flow adjusted for funding of defined benefit plans, as the fundingrequirements are largely non-discretionary and calculated independently of thenet defined benefit plans recovery reflected in the calculation previously.Free cash flow for 2008, based on defined benefit plans contributions,decreased by an additional $21 million.

 

The Company’sstrategy is to maintain the financial policies and guidelines set out below.The Company believes that these measures are currently at the optimal level andby maintaining credit ratings in the range of BBB+ to A-, or the equivalent,provide reasonable access to capital markets.

 

TELUS’long-term financial guidelines and policies are:

 

·      Net debt toEBITDA – excluding restructuring costs of 1.5 to 2.0 times

 

The ratio for 2008 was 1.9 times, an increase of 0.2from 2007, as higher net debt was partly offset by improved EBITDA beforerestructuring costs.

 

·      Dividend payoutratio of 45 to 55% of sustainable net earnings

 

The target guideline for the annual dividendpayout ratio is on a prospective basis, rather than on a trailing basis, and is45 to 55% of sustainable net earnings. The ratios based on actual earnings for 2008and 2007 were 54% and 47%, respectively. The ratio calculated to exclude incometax-related adjustments from earnings in 2008 was 56%. The comparable ratio for2007, also excluding the net-cash settlement feature expense, was 54%.

 

 

### **7.5Credit facilities**

 

On March 3, 2008, TELUSCorporation closed a new $700 million, 364-day credit facility with aselect group of Canadian banks. On December 15, the Company renewed thiscredit facility, extending the term to March 1, 2010, under substantiallythe same terms and conditions, except for increased cost. This new facilityprovides incremental liquidity to TELUS and allows the Company to continue tomeet one of its financial objectives, which is to generally maintain$1 billion in available liquidity. The financial ratio tests in the newfacility are substantially the same as those in the 2012 $2 billionsyndicated facility, which states that the borrower will not permit its netdebt to operating cash flow ratio to exceed 4 to 1 and may not permitits operating cash flow to interest expense ratio to be less than2 to 1, each as defined. The 364-day credit facility is unsecured andbears interest at Canadian prime and Canadian bankers’ acceptance rates, plusapplicable margins.

 

43

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At December 31,2008, TELUS had available liquidity of $1.15 billion from unutilizedcredit facilities, as well as unutilized availability under its accountsreceivable securitization program, consistent with the Company’s objective ofmaintaining at least $1 billion of available liquidity.

 

**TELUS credit facilities at December 31,2008**

 
| **($ in millions)**    | ** ** | **Expiry**         | ** ** | **Size** | ** ** | **Drawn** | ** ** | **Outstanding  undrawn  letters of  credit** | ** ** | **Backstop for  commercial  paper  program** | ** ** | **Available  liquidity** | ** ** |
|----------------------------------|------------|--------------------|------------|----------|------------|-----------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|
| Five-year  revolving facility(1) |       | May 1, 2012   |       | 2,000    |       | (980      | )          | (201                                              | )          | (432                                              | )          | 387                      |       |
| 364-day  revolving facility(2)   |       | March 1, 2010 |       | 700      |       | —    |       | —                                            |       | —                                            |       | 700                      |       |
| Other bank  facilities           |       | —             |       | 78       |       | (11       | )          | (3                                                | )          | —                                            |       | 64                       |       |
| Total                            |       | —             |       | 2,778    |       | (991      | )          | (204                                              | )          | (432                                              | )          | 1,151                    |       |

 

----

(1)    Canadian dollars or U.S. dollar equivalent.

(2)    Canadian dollars only. Originally due March 2,2009, the term of this facility was extended in December 2008.

 

TELUS’ revolvingcredit facilities contain customary covenants, including a requirement thatTELUS not permit its consolidated Leverage Ratio (debt to trailing 12-monthEBITDA) to exceed 4 to 1 (approximately 1.9 to 1 at December 31,2008) and not permit its consolidated Coverage Ratio (EBITDA to interestexpense on a trailing 12-month basis) to be less than 2 to 1 (approximately8.3 to 1 at December 31, 2008) at the end of any financialquarter. There are certain minor differences in the calculation of the LeverageRatio and Coverage Ratio under the credit agreements as compared with thecalculation of Net debt to EBITDA and EBITDA interest coverage. Historically,the calculations have not been materially different. The covenants are notimpacted by revaluation of capital assets, intangible assets and goodwill foraccounting purposes. Continued access to TELUS’ credit facilities is notcontingent on the maintenance by TELUS of a specific credit rating.

 

### **7.6Accounts receivable sale**

 

TELUSCommunications Inc. (TCI), a wholly owned subsidiary of TELUS, is a party to anagreement with an arm’s-length securitization trust associated with a majorSchedule I bank, under which TCI is able to sell an interest in certain ofits trade receivables up to a maximum of $650 million. As a result ofselling the interest in certain of the trade receivables on a fully servicedbasis, a servicing liability is recognized on the date of sale and is, in turn,amortized to earnings over the expected life of the trade receivables. A March 31,2008 amendment resulted in the term being extended to July 17, 2009, forthis revolving-period securitization agreement.

 

TCIis required to maintain at least a BBB (low) credit rating by DBRS Ltd. or thesecuritization trust may require the sale program to be wound down. Thenecessary credit rating was exceeded by three levels at A (low) as of February 11,2009.

 
| **Balance of proceeds from  securitized receivables********($ millions)** | ** ** | **2008,  Dec. 31** | ** ** | **2008,  Sept. 30** | ** ** | **2008,  June 30** | ** ** | **2008,  Mar. 31** | ** ** | **2007,  Dec. 31** | ** ** | **2007,  Sept. 30** | ** ** | **2007,  June 30** | ** ** | **2007,  Mar. 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                                                               |       |                    |       |                     |       |                    |       |                    |       |                    |       |                     |       |                    |       |                    |       |
| ** **                                                                                         |       | **300**                 |       | 250                      |       | 150                     |       | 500                     |       | 500                     |       | 550                      |       | 500                     |       | 150                     |       |

 

### **7.7Credit ratings**

 

Therewere no changes to the Company’s investment grade credit ratings in 2008. DBRSLtd. confirmed its credit ratings and trend for TELUS and TCI on March 27,2008, and on April 7, assigned a rating and trend of A (low), stable,to TELUS’ new $500 million 5.95%, seven-year unsecured Note issue. DBRSconfirmed its rating for TELUS Corporation’s commercial paper program at R-1(low), stable, on August 7, 2008.

 

On April 2,Moody’s Investors Service (Moody’s) assigned a Baa1 rating with a stableoutlook to TELUS’ new debt issue, while confirming the same for TELUS’ existingsenior unsecured Notes. On April 3, FitchRatings assigned a BBB+ ratingwith a stable outlook to the new TELUS debt issue. Standard and Poor’sassigned a BBB+ rating with a stable outlook to the new Series CE Notes.On December 17, FitchRatings re-affirmed its ratings with a stableoutlook.

 

44

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| **Credit rating summary** | ** ** | **DBRS Ltd.** | ** ** | **S&P** | ** ** | **Moody’s** | ** ** | **FitchRatings** | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------|------------|------------------|------------|------------------|------------|
|                                |       |               |       |        |       |             |       |             |       |
| Trend  or outlook                   |       | Stable             |       | Stable      |       | Stable           |       | Stable           |       |
|                                |       |               |       |        |       |             |       |             |       |
| **TELUS Corporation**               | ** ** | ** **         | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Notes                               |       | A (low)            |       | BBB+        |       | Baa1             |       | BBB+             |       |
| Commercial  paper                   |       | R-1 (low)          |       | —      |       | —           |       | —           |       |
|                                |       |               |       |        |       |             |       |             |       |
| **TELUS Communications Inc.**       | ** ** | ** **         | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Debentures                          |       | A (low)            |       | BBB+        |       | —           |       | BBB+             |       |
| Medium-term  notes                  |       | A (low)            |       | BBB+        |       | —           |       | BBB+             |       |
| First  mortgage bonds               |       | A (low)            |       | A-          |       | —           |       | —           |       |

### ** **

### **7.8 Financialinstruments, commitments and contingent liabilities**

### ** **

*Financial instruments (Note 5 ofthe Consolidated financial statements)*

 

The Company’s financial instruments and the nature ofrisks that they may be subject to are set out in the following table:

 
| ** **                                        | ** ** | **Risks**  | ** ** |
|---------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Market risks** | ** ** |
| **Financial instrument**                     | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest rate** | ** ** | **Other price** | ** ** |
| **Measured  at cost or amortized cost**           |       |       |       |   |   |   |   |   |   |   |   |
| Cash and  temporary investments                   |       | X          |       |   |   | X |   | X |   |   |   |
| Accounts  receivable                              |       | X          |       |   |   | X |   |   |   |   |   |
| Accounts  payable                                 |       |       |       | X |   | X |   |   |   |   |   |
| Restructuring  accounts payable                   |       |       |       | X |   |   |   |   |   |   |   |
| Short-term  obligations                           |       |       |       | X |   |   |   | X |   |   |   |
| Long-term  debt                                   |       |       |       | X |   | X |   | X |   |   |   |
| **Measured  at fair value**                       |       |       |       |   |   |   |   |   |   |   |   |
| Short-term  investments                           |       |       |       |   |   |   |   | X |   | X |   |
| Long-term  investments                            |       |       |       |   |   |   |   |   |   | X |   |
| Foreign  exchange derivatives(1)                  |       | X          |       | X |   | X |   |   |   |   |   |
| Share-based  compensation derivatives(1)          |       | X          |       | X |   |   |   |   |   | X |   |
| Cross  currency interest rate swap derivatives(1) |       | X          |       | X |   | X |   | X |   |   |   |

 

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(1)             Use of derivative financial instruments issubject to a policy which requires that no derivative transaction be enteredinto for the purpose of establishing a speculative or leveraged position (thecorollary being that all derivative transactions are to be entered into forrisk management purposes only) and sets criteria for the creditworthiness ofthe transaction counterparties.

 

Credit risk

 

Credit risk associated with cash and temporaryinvestments is minimized substantially by ensuring that these financial assetsare placed with: governments; major financial institutions that have beenaccorded strong investment grade ratings by a primary rating agency; and/or othercreditworthy counterparties. An ongoing review is performed to evaluate changesin the status of counterparties.

 

Credit risk associated with accounts receivable isminimized by the Company’s large and diverse customer base, which coverssubstantially all consumer and business sectors in Canada. The Company followsa program of credit evaluations of customers and limits the amount of creditextended when deemed necessary. The Company maintains allowances for potentialcredit losses, and any such losses to date have been within management’sexpectations.

 

Counterparties to the Company’s cross currencyinterest rate swap agreements, share-based compensation cash-settled equityforward agreements and foreign exchange derivatives are major financial institutionsthat have all been accorded investment grade ratings by a primary ratingagency. The dollar amount of credit exposure under contracts with any onefinancial institution is limited and counterparties’ credit ratings aremonitored. The Company does not give or receive collateral on swap agreementsand hedging items due to its credit rating and those of its counterparties.While the Company is exposed to credit losses due to the non-performance of itscounterparties, the Company considers the risk of this remote. The Company’sderivative liabilities do not have credit-risk-related contingent features.

 

Liquidity risk

 

As a component of capital structure financial policies, discussed under*Capabilities – Section 4.3 Liquidity andcapital resources*, the Company manages liquidity risk by maintainingbilateral bank facilities and syndicated credit facilities, by maintaining acommercial paper program, by the sales of trade receivables to an arm’s-lengthsecuritization trust, by 

 

45

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continuously monitoring forecastand actual cash flows and by managing maturity profiles of financial assets andfinancial liabilities.

 

The Company has significant debtmaturities beginning in 2011. The Company has access to a shelf prospectus, ineffect until September 2009, pursuant to which it can offer$2.5 billion of debt or equity securities, which may be renewed andextended. The Company has credit facilities available, including a$2 billion facility until 2012 (see *Section 7.5 Creditfacilities*). The Company believes that its investment grade creditratings provide reasonable access to capital markets.

 

Currency risk

 

The Company’s functional currency is the Canadiandollar, but it regularly transacts in U.S. dollars due to certain routinerevenues and operating costs being denominated in U.S. dollars, as well assourcing some inventory purchases and capital asset acquisitionsinternationally. The U.S. dollar is the only foreign currency to which theCompany has a significant exposure.

 

The Company’s foreign exchange risk managementincludes the use of foreign currency forward contracts and currency options tofix the exchange rates on short-term U.S. dollar denominated transactions andcommitments. Hedge accounting is applied to these short-term foreign currencyforward contracts and currency options on an exception basis only.

 

The Company is also exposed to currency risks in thatthe fair value or future cash flows of its U.S. dollar denominated long-termdebt will fluctuate because of changes in foreign exchange rates. Currencyhedging relationships have been established for the related semi-annualinterest payments and principal payment at maturity, as set out in Note 18(b) ofthe Consolidated financial statements.

 

Interest rate risk

 

Changes in market interest rates will causefluctuations in the fair value or future cash flows of temporary investments,short-term investments, short-term obligations, long-term debt and/or crosscurrency interest rate swap derivatives.

 

When the Company has temporary investments, they haveshort maturities and fixed rates, thus their fair value will fluctuate withchanges in market interest rates; absent monetization prior to maturity, therelated future cash flows do not change due to changes in market interestrates.

 

If the balance of short-term investments includes debtinstruments and/or dividend-paying equity instruments, the Company could beexposed to interest rate risks.

 

As short-term obligations arising from bilateral bankfacilities, which typically have variable interest rates, are rarelyoutstanding for periods that exceed one calendar week, interest rate riskassociated with this item is not material.

 

In respect of the Company’s currently outstandinglong-term debt, other than for commercial paper and amounts drawn on its creditfacility, it is all fixed-rate debt. The fair value of fixed-rate debtfluctuates with changes in market interest rates; absent early redemptionand/or foreign exchange rate fluctuations, the related future cash flows donot. Due to the short maturities of commercial paper, its fair values are notmaterially affected by changes in market interest rates but its cash flowsrepresenting interest payments may be if the commercial paper is rolled over.

 

Amounts drawn on the Company’s short-term andlong-term credit facilities will be affected by changes in market interestrates in a manner similar to commercial paper.

 

Similar to fixed-rate debt, the fair value of theCompany’s cross currency interest rate swap derivatives fluctuates with changesin market interest rates as the interest rate swapped to is fixed; absent earlyredemption, the related future cash flows do not change due to changes inmarket interest rates.

 

Other price risk

 

If the balance of short-term investments includesequity instruments, the Company would be exposed to equity price risks. TheCompany is exposed to equity price risks arising from long-term investmentsclassified as available-for-sale. Such investments are held for strategic ratherthan trading purposes. The Company is exposed to other price risk arising fromcash-settled share-based compensation (appreciating Common Share and Non-VotingShare prices increase both the expense and the potential cash outflow).Cash-settled equity swap agreements have been entered into that establish a capon the Company’s cost associated with its net-cash settled share options andfix the Company’s cost associated with its restricted stock units.

 

Market risk

 

Net income and other comprehensive income for the yearended December 31, 2008, could have varied if the Canadian dollar to U.S.dollar foreign exchange rates, market interest rates and the Company’sNon-Voting Share prices varied by reasonably possible amounts from their actualstatement of financial position date values.

 

46

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The sensitivity analysis of the Company’s exposure tocurrency risk, interest rate risk, and other price risk arising fromshare-based compensation is shown in Note 5(g) of the Consolidatedfinancial statements.

 

Fairvalue

 

Thecarrying value of cash and temporary investments, accounts receivable, accountspayable, restructuring accounts payable and short-term obligations approximatestheir fair values due to the immediate or short-term maturity of thesefinancial instruments. The carrying values of the Company’s investmentsaccounted for using the cost method do not exceed their fair values.

 

Thecarrying value of short-term investments equals their fair value as they are classifiedas held for trading. The fair value is determined directly by reference toquoted market prices in active markets.

 

Thefair values of the Company’s long-term debt are based on quoted market pricesin active markets. The fair values of the Company’s derivative financialinstruments used to manage exposure to interest rate and currency risks areestimated based on quoted market prices in active markets for the same orsimilar financial instruments or on the current rates offered to the Companyfor financial instruments of the same maturity as well as the use of discountedfuture cash flows using current rates for similar financial instruments subjectto similar risks and maturities.

 

Thefair values of the Company’s derivative financial instruments used to manageexposure to increases in compensation costs arising from certain forms ofshare-based compensation are based upon fair value estimates of the relatedcash-settled equity forward agreements provided by the counterparty to thetransactions (such fair value estimates being largely based upon the Company’sCommon Share and Non-Voting Share prices as at the statement of financialposition dates).

 

*Commitments and contingentliabilities*

 

Contractual obligations

 

The Company’s known contractual obligations at December 31,2008, are quantified in the following table. Interest obligations are includedin long-term debt maturities. Long-term debt principal maturities andassociated interest obligations, as at December 31, 2008, are presentedseparately in *Capabilities - Section 4.3 Liquidityand resources*.

 
| ** **            | ** ** | **Long-term debt maturities ****(1)** | ** ** | ** **              | ** ** | ** **                                                          | ** ** | ** **                         | ** ** | ** **                             | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| **($ millions)** | ** ** | **All except  capital leases**             | ** ** | **Capital leases** | ** ** | **Other long-term  liabilities ****(2)**** ****(3)** | ** ** | **Operating  leases ****(4)** | ** ** | **Purchase  obligations ****(5)** | ** ** | **Total** | ** ** |
| 2009                  |       | 463                                                  |       | 3                       |       | 17                                                                  |       | 261                                |       | 437                                    |       | 1,181 |   |
| 2010                  |       | 540                                                  |       | 2                       |       | 30                                                                  |       | 257                                |       | 50                                     |       | 879 |   |
| 2011                  |       | 3,279                                                |       | 1                       |       | 19                                                                  |       | 239                                |       | 19                                     |       | 3,557 |   |
| 2012                  |       | 1,891                                                |       | —                  |       | 20                                                                  |       | 220                                |       | 16                                     |       | 2,147 |   |
| 2013                  |       | 447                                                  |       | —                  |       | 20                                                                  |       | 204                                |       | 3                                      |       | 674 |   |
| Thereafter            |       | 2,699                                                |       | —                  |       | 164                                                                 |       | 1,080                              |       | 1                                      |       | 3,944 |   |
| Total                 |       | 9,319                                                |       | 6                       |       | 270                                                                 |       | 2,261                              |       | 526                                    |       | 12,382 |   |

 

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| (1) | Where applicable, long-term debt maturities  reflect hedged foreign exchange rates as at December 31, 2008. Interest  payment cash outflows in respect of commercial paper and amounts drawn under  the Company’s credit facility have been calculated based on rates in effect  as at December 31, 2008.                                                                                                                                                                                                                                                                                                       |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Items that do not result in a future outlay of  economic resources, such as deferred gains on sale-leasebacks of buildings  and deferred customer activation and connection fees, have been excluded.                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3) | Uncertain income tax positions that could  result in current income taxes being payable have been, or will be,  substantially funded over the next 12 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4) | Of the total minimum operating lease payments  of $2,261 million, $2,195 million was in respect of land and  buildings; approximately 60% was in respect of the Company’s five largest  operating leases, all of which were for office premises over various terms,  with expiry dates that range between 2016 and 2026. See Note 20(b) of  the Consolidated financial statements for further details on operating  leases.                                                                                                                                                                                |
| (5) | Where applicable, purchase obligations reflect  foreign exchange rates as at the current year-end, December 31, 2008.  Purchase obligations include both future operating and capital expenditures  that have been contracted for as at the current year-end and include the most  likely estimates of prices and volumes, where necessary. As purchase  obligations reflect market conditions at the time the obligation was incurred  for the items being purchased, they may not be representative of future  years. Obligations from personnel supply contracts and other such labour  agreements have been excluded. |

 

Price cap deferral accounts

 

The price cap deferral accountconcept was introduced by the CRTC in 2002 in *TelecomDecisions 2002-34* and *2002-43*, asdiscussed further in Note 20(a) of the Consolidated financial statements.From June 2002 through May 2006, the deferral account conceptrequired the Company to defer income statement recognition of a portion ofmonies received in respect of residential basic services provided to non-highcost serving areas. Subsequent decisions were issued in respect of applicationand disposition of funds in the deferral

 

47

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accounts. The Company mayrecognize amounts in the deferral account upon undertaking qualifying actions,such as service improvement programs in qualifying non-high cost serving areas,rate reductions (including those provided to competitors), expansion ofbroadband services in incumbent local exchange areas to rural and remotecommunities, and enhancement of access to telecommunications services forindividuals with disabilities. To the extent the deferral account balanceexceeds approved initiatives, the remaining balance is to be distributed in theform of a one-time rebate to residential subscribers in non-high cost servingareas.

 

The Company must makesignificant estimates and assumptions in respect of the deferral account given thecomplexity and interpretation required of these decisions. The CRTC may, uponits periodic review of the deferral account, disagree with management’sestimates and assumptions and adjust the deferral account balance and suchadjustment could be material. The CRTC ultimately decides when the deferralaccount is settled. An aggregate liability of $146 million was recorded asat December 31, 2008 (2007 — $147 million).

 

There have been a series ofescalating court actions since the issuance of CRTC TelecomDecision 2006-9 and Telecom Decision 2008-1 and the litigants haveincluded the Consumers Association of Canada, the National Anti-PovertyOrganization, Bell Canada and the Company. The deferral account is currentlythe subject of appeals to the Supreme Court of Canada. The Company filed itsappeal asking the Supreme Court of Canada to permit incumbent local exchangecarriers to file for approval further lists of communities that would beeligible for broadband expansion from the remaining funds in the deferralaccount rather than rebating the remaining funds to local telephonesubscribers. The Supreme Court of Canada further granted the Company a motionfor a stay of CRTC Telecom Decision 2006-9 in so far as it requires a rebate tolocal telephone subscribers. The appeals by the Company, Bell Canada andcertain consumer groups are currently scheduled to be heard by the SupremeCourt of Canada in March 2009. The Company anticipates a decision on thismatter in the latter half of 2009.

 

Guarantees (Note 20(c) of the Consolidatedfinancial statements)

 

Canadian GAAP requires the disclosure of certain typesof guarantees and their maximum, undiscounted amounts. As at December 31,2008, the Company’s maximum undiscounted guarantee amounts, without regard forthe likelihood of having to make such payment, were not material.

 

In the normal course of operations, the Company mayprovide indemnification in conjunction with certain transactions. Other thanobligations recorded as liabilities at the time of the transaction,historically the Company has not made significant payments under theseindemnifications.

 

In connection with its 2001 disposition of TELUS’directory business, the Company agreed to bear a proportionate share of the newowner’s increased directory publication costs if the increased costs were toarise from a change in the applicable CRTC regulatory requirements. The Company’sproportionate share would have been 80% through May 2006, declining to 40%in the next five-year period and then to 15% in the final five years. Shouldthe CRTC take any action that would result in the owner being prevented fromcarrying on the directory business as specified in the agreement, TELUS wouldindemnify the owner in respect of any losses that the owner incurred. As at December 31,2008, the Company has no liability recorded in respect of indemnificationobligations.

 

Claims and lawsuits

 

A number of claims and lawsuits seeking damages andother relief are pending against the Company. It is impossible at this time forthe Company to predict with any certainty the outcome of such litigation.However, management is of the opinion, based upon legal assessment andinformation presently available, that it is unlikely that any liability, to theextent not provided for through insurance or otherwise, would be material inrelation to the Company’s consolidated financial position, other than asdisclosed in Note 20(d) of the Consolidated financial statements and*Section 10.9Litigation and legal matters*.

 

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### **7.9 Outstandingshare information**

### ** **

The table below contains a summary of the outstandingshares for each class of equity at December 31, 2008. The total number ofoutstanding and issuable shares is also presented, assuming full conversion ofoutstanding options and shares reserved for future option grants. The number ofoutstanding and issuable shares at January 31, 2009 was not materiallydifferent from December 31, 2008.

 
| **Outstanding shares  (millions of shares)**          | ** ** | **Common  Shares** | ** ** | **Non-Voting  Shares** | ** ** | **Total  shares** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------------|------------|
|                                                                 |       |               |       |                   |       |              |       |
| Common  equity                                                       |       |               |       |                   |       |              |       |
| Outstanding  shares at December 31, 2008                        |       | 175                |       | 143                    |       | 318               |  (1)  |
| Options  outstanding and issuable (2) at December 31, 2008 |       | —             |       | 15                     |       | 15                |       |
|                                                                 |       | 175                |       | 158                    |       | 333               |       |

 

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| (1) | For the purposes of  calculating diluted earnings per share, the number of shares was  322 million for the year ended December 31, 2008. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Assuming full conversion and  ignoring exercise prices.                                                                                            |

## ** **

## **8.**              Criticalaccounting estimates and accounting policy developments

## ** **

### **8.1 Criticalaccounting estimates**

### ** **

TELUS’ significant accounting policies aredescribed in Note 1 of the Consolidated financial statements. Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions.Management’s estimates and assumptions affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates. The Company’s critical accounting estimates are described below andare generally discussed with the Audit Committee each quarter.

 

General
| · | Unless  otherwise specified in the discussion of the specific critical accounting  estimates, the Company is not aware of trends, commitments, events or  uncertainties that it reasonably expects to materially affect the methodology  or assumptions associated with the critical accounting estimates, subject to  the items identified in the *Caution regarding  forward-looking statements* section of this Management’s discussion  and analysis.                                                                                                                                                                                                                                                                                           |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | In  the normal course, changes are made to assumptions underlying all critical  accounting estimates to reflect current economic conditions, updating of  historical information used to develop the assumptions and changes in the  Company’s debt ratings, where applicable. Unless otherwise specified in the  discussion of the specific critical accounting estimates, it is expected that  no material changes in overall financial performance and financial statement  line items would arise either from reasonably likely changes in material  assumptions underlying the estimate or from selection of a different estimate  from within a valid range of estimates.                                                                     |
| · | All  critical accounting estimates are uncertain at the time of making the  estimate and affect the following Consolidated statements of income line  items: income taxes (except for estimates about goodwill) and Net income.  Similarly, all critical accounting estimates affect the following  Consolidated statements of financial position line items: Current assets  (Income and other taxes receivable); Current liabilities (Income and other  taxes payable and Current portion of future income taxes); Future income tax  liabilities; and Shareholders’ equity (retained earnings). Generally, the  discussion of each critical accounting estimate does not differ between the  Company’s two segments: wireline and wireless. |
| · | The  critical accounting estimates affect the Consolidated statements of income  and Consolidated statements of financial position line items as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| ** **                                                        | ** ** | **Consolidated statements of income** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                           | ** ** | **Operating expenses** | ** ** | ** ** | ** ** |
| **Consolidated statements of  financial position** | ** ** | **Operating  revenues**                              | ** ** | **Operations** | ** ** | **Depreciation** | ** ** | **Amortization  of intangible  assets** | ** ** | **Other expense,  net** | ** ** |
| Accounts  receivable                                              |       |                                                 |       | X |   |   |   |   |   |   |   |
| Inventories                                                       |       |                                                 |       | X |   |   |   |   |   |   |   |
| Capital  assets and goodwill (1)                                  |       |                                                 |       |   |   | X |   | X |   |   |   |
| Investments                                                       |       |                                                 |       |   |   |   |   |   |   | X |   |
| Advance  billings and customer deposits                           |       | X                                                    |       | X |   | X |   | X |   |   |   |
| Employee  defined benefit pension plans                           |       |                                                 |       | X |   | X (2) |   | X (2) |   |   |   |

 

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| (1) | Accounting  estimate, as applicable to intangible assets with indefinite lives and goodwill,  primarily affects the Company’s wireless segment. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Accounting  estimate impact due to internal labour capitalization rates.                                                                             |

 

Accounts receivable

 

*General*

 
| · | The Company  considers the business area that gave rise to the accounts receivable,  performs statistical analysis of portfolio delinquency trends and performs  specific account identification when determining its allowance for doubtful  accounts. This information is also used in conjunction with current  market-based rates of borrowing to determine the fair value of its residual  cash flows arising from accounts receivable securitization. The fair value of  the Company’s residual cash flows arising from the accounts receivable  securitization is also referred to as its retained interest. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Assumptions  underlying the allowance for doubtful accounts include portfolio delinquency  trends and specific account assessments made when performing specific account  identification. Assumptions underlying the determination of the fair value of  residual cash flows arising from accounts receivable securitization include  those developed when determining the allowance for doubtful accounts as well  as the effective annual discount rate.                                                                                                                                                               |
| · | These  accounting estimates are in respect of the Accounts receivable line item on  the Company’s Consolidated statements of financial position comprising  approximately 5% of total assets as at December 31, 2008 (4% as at  December 31, 2007). If the future were to adversely differ from  management’s best estimates of the fair value of the residual cash flows and  the allowance for doubtful accounts, the Company could experience a bad debt  charge in the future. Such a bad debt charge does not result in a cash  outflow.                                                   |

 

*Keyeconomic assumptions used to determine the fair value of residual cash flowsarising from accounts receivable securitization*

 
| ·                                 | The  estimate of the Company’s fair value of its retained interest could  materially change from period to period due to the fair value estimate being  a function of the amount of accounts receivable sold, which can vary on a  monthly basis. See Note 14 of the Consolidated financial statements for  further analysis.                                                                                                                                                                                                                  |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| *The  allowance for doubtful accounts* |
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| ·                                 | The  estimate of the Company’s allowance for doubtful accounts could materially change  from period to period due to the allowance being a function of the balance  and composition of accounts receivable, which can vary on a month-to-month  basis. The variance in the balance of accounts receivable can arise from a  variance in the amount and composition of operating revenues, from a variance  in the amount of accounts receivable sold to the securitization trust and  from variances in accounts receivable collection performance. |

 

Inventories

 

*The allowance for inventory obsolescence*

 
| · | The Company  determines its allowance for inventory obsolescence based upon expected  inventory turnover, inventory aging, and current and future expectations with  respect to product offerings.                                                                                                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Assumptions  underlying the allowance for inventory obsolescence include future sales  trends and offerings and the expected inventory requirements and inventory  composition necessary to support these future sales offerings. The estimate  of the Company’s allowance for inventory obsolescence could materially change  from period to period due to changes in product offerings and consumer  acceptance of those products. |
| · | This accounting  estimate is in respect of the Inventory line item on the Company’s  Consolidated statements of financial position, which comprises approximately  2% of total assets as at December 31, 2008 (1% as at                                                                                                                                                                                                    |

 

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|   | December 31,  2007). If the allowance for inventory obsolescence were inadequate, the  Company could experience a charge to operations expense in the future. Such  an inventory obsolescence charge does not result in a cash outflow. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Capital assets and Goodwill

 

*General*

 

·                  Capital assets and Goodwillrepresent approximately 65% and 19%, respectively, of TELUS’ Consolidatedstatements of financial position, as at December 31, 2008(proportions unchanged from December 31, 2007). If TELUS’ estimateduseful lives of assets were incorrect, it could experience increased ordecreased charges for amortization of intangible assets or depreciation in thefuture. If the future were to adversely differ from management’s best estimateof key economic assumptions and associated cash flows were to materiallydecrease, the Company could potentially experience future material impairmentcharges in respect of its capital assets, including intangible assets withindefinite lives and goodwill. If intangible assets with indefinite lives weredetermined to have finite lives at some point in the future, the Company couldexperience increased charges for amortization of intangible assets. Suchcharges do not result in a cash outflow and of themselves would not affect theCompany’s immediate liquidity.

 

*The estimated useful lives of assets; therecoverability of tangible assets*

 

·                  The estimated useful lives ofassets are determined by a continuing program of asset life studies. Therecoverability of tangible assets is significantly impacted by the estimateduseful lives of assets.

 

·                  Assumptions underlying theestimated useful lives of assets include timing of technological obsolescence,competitive pressures and future infrastructure utilization plans.

 

*The recoverability of intangible assets with indefinitelives*;*therecoverability of goodwill*

 

·                  Consistentwith current industry-specificvaluation methods, the Company uses a discounted cash flow model combined witha market-based approach in determining the fair value of its spectrum licencesand goodwill. See Note 15(c) of the Consolidated financial statementsfor further discussion of methodology.

 

·                  The mostsignificant assumptions underlying the recoverability of intangible assets withindefinite lives and goodwill include: future cash flow and growth projections,including economic risk assumptions and estimates of achieving desired keyoperating metrics and drivers; future weighted average cost of capital; andannual earnings multiples. Significant factors impacting these assumptionsinclude estimates of future market share, key operating metrics such as churnand ARPU, level of competition, technological developments, interest rates,market economic trends, debt levels and the cost of debt. Sensitivity testingis discussed in Note 15(c) of the Consolidated financial statements.

 

Investments

 

*The recoverability of long-term investments*

 

·                  The Company assesses therecoverability of its long-term investments on a regular, recurring basis. Therecoverability of investments is assessed on a specific identification basistaking into consideration expectations about future performance of the investmentsand comparison of historical results to past expectations.

 

·                  The most significant assumptionsunderlying the recoverability of long-term investments are the achievement offuture cash flow and operating expectations. The estimate of the Company’srecoverability of long-term investments could change from period to period dueto the recurring nature of the recoverability assessment and due to the natureof long-term investments (the Company does not control the investees).

 

·                  If the allowance for recoverabilityof long-term investments were inadequate, the Company could experience anincreased charge to Other expense in the future. Such a provision forrecoverability of long-term investments does not result in a cash outflow.

 

Income tax assets and liabilities

 

*The amount and composition of income tax assets andincome tax liabilities, including the amount of unrecognized tax benefits*

 

·                  Assumptions underlying thecomposition of income tax assets and liabilities, including the amount ofunrecognized tax benefits, are based upon an assessment of tax positions as towhether, on their technical merit, they are more likely than not of being sustainedupon examination, and then an estimate of the amount of tax benefit that isgreater than 50% likely of being realized upon ultimate settlement with taxingauthorities. Such assessments are based upon the applicable income taxlegislation, regulations and interpretations, all of which in turn are subjectto interpretation.

 

·                  Current income tax assets andliabilities are estimated based upon the amount of tax that is calculated asbeing owed to taxing authorities, net of periodic instalment payments. Futureincome tax liabilities are comprised of the tax effect of temporary differencesbetween the carrying amount and tax basis of assets and liabilities as well asthe tax effect of undeducted tax losses. The timing of the reversal of thetemporary differences is estimated and the tax rate substantively enacted forthe periods of reversal is applied to the temporary differences. The carryingamounts of

 

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assets and liabilities are based upon the amountsrecorded in the financial statements and are therefore subject to accounting estimatesthat are inherent in those balances. The tax basis of assets and liabilities aswell as the amount of undeducted tax losses are based upon the assessment oftax positions and measurement of tax benefits as noted above. Assumptions as tothe timing of reversal of temporary differences include expectations about thefuture results of operations and cash flows. The composition of income taxliabilities is reasonably likely to change from period to period because ofchanges in the estimation of these significant uncertainties.

 

·                  This accounting estimate is inrespect of material asset and liability line items on the Company’sConsolidated statements of financial position comprising less than 1% of totalassets and approximately 10% of total liabilities and shareholders’ equity asat December 31, 2008 (less than 1% of total assets and approximately 9% oftotal liabilities and shareholders’ equity as at December 31, 2007). Ifthe future were to adversely differ from management’s best estimate of the likelihoodof tax positions being sustained, the amount of tax benefit that is greaterthan 50% likely of being realized, the future results of operations, the timingof reversal of deductible temporary differences and taxable temporarydifferences, and the tax rates applicable to future years, the Company couldexperience material future income tax adjustments. Such future income taxadjustments could result in an acceleration of cash outflows at an earlier timethan might otherwise be expected.

 

Advance billings and customer deposits

 

*Theaccruals for CRTC deferral account liabilities*

 

·                  The deferral account arose from theCRTC requiring the Company to defer the income statement recognition of aportion of the monies received in respect of residential basic servicesprovided to non-high cost serving areas. This deferral requirement ended May 31, 2006.The critical estimate arises from the Company’s recognition of the deferredamounts. The Company may recognize the deferred amounts upon the undertaking ofqualifying actions, such as service improvement programs in qualifying non-highcost serving areas, expansion of broadband services to rural and remotecommunities in incumbent local exchange carrier operating territories,initiatives to enhance accessibility of telecommunications services forindividuals with disabilities, rate reductions (including those mandated by theCRTC in respect of discounts on Competitor Digital Network services) and/orrebates to customers. As described in Note 20(a) of the Consolidatedfinancial statements and *Section 10.3 Regulatory– Price cap regulation*, amounts in the deferral account arecurrently the subject of appeals to the Supreme Court of Canada by TELUS, BellCanada and certain consumer groups.

 

·                  Assumptions underlying the accrualsfor the CRTC deferral account that are uncertain at the time of making theestimate include: (i) what actions will ultimately qualify for recognitionof deferred amounts; and (ii) over what period of time will qualifyingdeferred amounts be recognized in the Company’s Consolidated statements ofincome. The manner in which deferred amounts are recognized, and the amountsthereof, are reasonably likely to change as such recognition is ultimatelydependent upon future decisions by the CRTC and resolution of appeals to theSupreme Court of Canada.

 

·                  This accounting estimate is inrespect of an item within the advance billings and customer deposits line itemon TELUS’ Consolidated statements of financial position and which, itself,comprises approximately 4% of total liabilities and shareholders’ equity as at December 31,2008 (4% as at December 31, 2007). If the Company’s estimate of deferredamounts recognized, and the timing of the recognition thereof, were to differmaterially from what the CRTC ultimately decides is allowable, revenues couldbe materially impacted. Such a revenue impact would not be expected to beaccompanied by a corresponding impact in net cash inflows. Should the consumergroups be successful in their appeal of the use of deferral account amounts,the Company may be required to remit a one-time refund to the majority of itslocal residential subscriber base. As the deferral account balance was fullyprovided for in previous financial statements, the potential refund will notimpact TELUS’ subsequent income from operations. Such a refund would result ina net cash outflow, potentially offset by reduced capital investment as theCompany re-addresses its intent to extend broadband services to uneconomicremote and rural communities. In the event that Bell Canada is successful in itsappeal, TELUS may realize additional revenue equal to the amount of thedeferral account that would otherwise have been rebated by the CRTC. Such arevenue impact would not be expected to be accompanied by a correspondingimpact in net cash inflows. If TELUS is successful in its appeal, the Companyexpects to file for CRTC approval further lists of rural and remote communitiesthat would be eligible for broadband expansion from the remaining funds in thedeferral account.

 

Employee defined benefit pension plans

 

*Certain actuarial and economic assumptions used indetermining defined benefit pension costs, accrued pension benefit obligationsand pension plan assets*

 

·                  The Company reviews industrypractices, trends, economic conditions and data provided by actuaries whendeveloping assumptions used in the determination of defined benefit pensioncosts and accrued pension benefit obligations. Pension plan assets aregenerally valued using market prices, however, some assets are valued using

 

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market estimates when market prices are not readilyavailable. Defined benefit pension costs are also affected by the quantitativemethods used to determine estimated returns on pension plan assets. Actuarialsupport is obtained for interpolations of experience gains and losses thataffect the defined benefit pension costs and accrued benefit obligations. Thediscount rate, which is used to determine the accrued benefit obligation, isbased upon the yield on long-term, high-quality fixed term investments, and isset annually at the end of each calendar year, basedupon yields on long-term corporate bond indices in consultation with actuaries. The expected long-term rate ofreturn is based upon forecasted returns of the major asset categories andweighted by plans’ target asset allocations. Future increases in compensationare based upon the current benefits policies and economic forecasts.

 

·                  Assumptions used in determiningdefined benefit pension costs, accrued pension benefit obligations and pensionplan assets include: discount rates, long-term rates of return for plan assets,market estimates and rates of future compensation increases. Material changesin overall financial performance and financial statement line items would arisefrom reasonably likely changes, because of revised assumptions to reflectupdated historical information and updated economic conditions, in the materialassumptions underlying this estimate. See Note 13(i) of the Consolidatedfinancial statements for further analysis.

 

·                  This accounting estimate is inrespect of a component of the largest operating expense line item on theCompany’s Consolidated statements of income. If the future were to adverselydiffer from management’s best estimate of assumptions used in determiningdefined benefit pension costs, accrued benefit obligations and pension planassets, the Company could experience future increased defined benefit pensionexpense. The magnitude of the immediate impact is lessened, as the excess of netactuarial gains and losses in excess of 10% of the greater of the benefitobligation and the fair value of the plan assets is amortized over the averageremaining service period of active employees of the plan.

 

### **8.2 Accountingpolicy developments**(Note 2 of the Consolidated financialstatements)

### ** **

*Transition to International Financial Reporting Standards (IFRS) asissued by the International Accounting Standards Board (IASB)*

 

In 2006, Canada’s AccountingStandards Board ratified a strategic plan that will result in Canadian GAAP, asused by publicly accountable enterprises, being replaced with InternationalFinancial Reporting Standards as issued by the International AccountingStandards Board (IFRS-IASB) over a transitional period to be complete by 2011.TELUS will be required to report using the IFRS-IASB standards effective forinterim and annual financial statements relating to fiscal years beginning nolater than on or after January 1, 2011, the date that the Company hasselected for adoption.

 

Canada’s Accounting StandardsBoard will phase in or transition to IFRS-IASB through a combination of threemethods: (i) as current joint-convergence projects of the United StatesFinancial Accounting Standards Board and the International Accounting StandardsBoard are agreed upon, they will be adopted by Canada’s Accounting StandardsBoard and may be introduced in Canada before the publicly accountableenterprises’ transition date to IFRS-IASB; (ii) standards identified byCanada’s Accounting Standards Board as key or significant in which theAccounting Standards Board has undertaken a project to converge Canadian GAAPwith the related IFRS prior to transition date and issued as Canadian GAAP;and (iii) standardsnot subject to a joint-convergence project have been exposed in an omnibusmanner for introduction at the time of the publicly accountable enterprises’transition date to IFRS-IASB. The first two transition methods may, or will,result in the Company either having the option to, or being required to,effectively, change over certain accounting policies to IFRS-IASB prior to 2011in the event a new standard is issued or early adoption is permitted.

 

The International AccountingStandards Board’s work plan currently, and expectedly, has projects underwaythat are expected to result in new pronouncements that continue to evolveIFRS-IASB, and as a result, IFRS-IASB as at the transition date is expected todiffer from its current form. In November 2008, the United StatesSecurities and Exchange Commission issued a proposed road map, with sevenmilestones, that would permit certain United States reporting issuers to useIFRS-IASB in their filings. This proposal is a significant development as italso contemplates mandatory usage of IFRS-IASB by United States reportingissuers as early as 2014 (such a mandatory usage decision – Milestone 6 –is anticipated to be made by the United States Securities and ExchangeCommission in 2011). It is not possible to currently assess the impact, if any,this proposal will have on the International Accounting Standards Board’s workplan; however, Milestone 1 is a requirement for improvements in accountingstandards and a subsequent consideration by the United States Securities andExchange Commission of whether IFRS-IASB are of high quality and sufficientlycomprehensive.

 

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There are several phases thatthe Company will have to complete on the path to changing over to IFRS-IASB:

 
| **Implementation phase**              | ** ** | **Description and status**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Initial impact assessment and scoping |       | This phase includes the identification of  significant differences between existing Canadian GAAP and IFRS-IASB, as  relevant to the Company’s specific instance.Based upon the current state of IFRS-IASB, this phase was completed in  the first quarter of 2008, using a diagnostic process, and identified a  modest number of topics possibly impacting either the Company’s financial  results and/or the Company’s effort necessary to change over to IFRS-IASB.  This diagnostic resulted in the development of a detailed plan under which  activities are being conducted. The IASB has activities currently underway  which may, or will, change IFRS-IASB and such change may, or will, impact the  Company. The Company will assess any such change as a component of its key  elements phase.                                                                                                                                                                                                                                                                                                                                      |
|                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Key elements                          |       | This phase includes identification, evaluation  and selection of accounting policies necessary for the Company to change over  to IFRS-IASB. As well, this phase includes other operational elements such as  information technology, internal control over financial reporting and  training.Currently underway are the identification, evaluation and selection of  accounting policies necessary for the Company to change over to IFRS-IASB;  consideration of impacts on operational elements, such as information  technology and internal control over financial reporting, are integral to  this process. As at December 31, 2008, approximately two-thirds of the  standards that relate to TELUS have been reviewed. Targeted training and  communications activities, which leveraged both internal and external  resources, occurred during the current reporting period. Training has also  been made available by way of an internal IFRS website dedicated to the  conversion.  The  Company has regularly updated its Audit Committee of the Board of Directors  on the status of the project, implications and expected range of impacts. |
|                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Embedding                             |       | This phase will integrate  the solutions into the Company’s underlying financial system and processes that  are necessary for the Company to change over to IFRS-IASB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

The Company will present itsresults for fiscal 2010 using contemporary Canadian GAAP. In 2011, the Companywill present its comparative results for fiscal 2010 using contemporaryIFRS-IASB. To accomplish this, in 2010 the Company will effectively maintaintwo parallel books of account.

 

In 2009, the Company willcontinue to review remaining standards for application to TELUS, carry outimpact assessments and provide targeted training. The Company will also makeaccounting policy choices and prepare its accounting systems accordingly, toenable preparation of its opening financial position under IFRS-IASB for 2010.Although its impact assessment activities are underway and progressing accordingto plan, continued progress is necessary before the Company can prudentlyincrease the specificity of the disclosure of pre- and post-IFRS-IASBchangeover accounting policy differences, other than as set out below:

 

*Financial instruments – disclosure; presentation*

 

As anactivity consistent with Canadian GAAP being converged with IFRS-IASB, theexisting recommendations for financial instrument disclosure were replaced withnew recommendations (CICA Handbook Section 3862); the existingrecommendations for financial instrument presentation were carried forward,unchanged (as CICA Handbook Section 3863).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA forfinancial instrument disclosures apply to the Company. As set out inNote 5 of the Consolidated financial statements, the new recommendations result in incremental disclosures, relative tothose previously required, with an emphasis on risks associated with bothrecognized and unrecognized financial instruments to which an entity is exposedduring the period and at the statement of financial position date, and how anentity manages those risks. The transitional provisions provide thatcertain of the incremental disclosures need not be provided on a comparativebasis in the year of adoption.

 

*Inventories*

 

As an activity consistent withCanadian GAAP being converged with IFRS-IASB, the previously existingrecommendations for accounting for inventories were replaced with newrecommendations (CICA Handbook Section 3031).

 

Commencingwith the Company’s 2008 fiscal year, the new recommendations of the CICA foraccounting for inventories apply to the Company. The new recommendations provide more guidance on the measurement anddisclosure requirements for inventories; significantly, the new recommendationsallow the reversals of previous write-downs to net realizable value where thereis a subsequent increase in the value of inventories. The Company’s results ofoperations and financial position are not materially affected by the new recommendations.

 

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*Goodwill and intangible assets*

 

As an activity consistent withCanadian GAAP being converged with IFRS-IASB, the previously existingrecommendations for goodwill and intangible assets and research and developmentcosts were replaced with new recommendations (CICA Handbook Section 3064).

 

Commencingwith the Company’s 2009 fiscal year, the new recommendations of the CICA forgoodwill and intangible assets will apply to the Company. The newrecommendations provide extensive guidance on when expenditures qualify forrecognition as intangible assets. The Company’s results of operations andfinancial position are not expected to be materially affected by the newrecommendations.

 

*Business combinations and non-controlling interests*

 

As an activity consistent withCanadian GAAP being converged with IFRS-IASB, the previously existingrecommendations for business combinations and consolidation financialstatements will be replaced with new recommendations for business combinations(CICA Handbook Section 1582), consolidations (CICA Handbook Section 1601)and non-controlling interests (CICA Handbook Section 1602).

 

Generally, the newrecommendations result in measuring business acquisitions at the fair value ofthe acquired business and a prospectively applied shift from a parent companyconceptual view of consolidation theory (which results in the parent companyrecording book values attributable to non-controlling interests) to an entityconceptual view (which results in the parent company recording fair valuesattributable to non-controlling interests). Unlike the corresponding newU.S. GAAP, which requires the recognition of the fair value of goodwillattributable to non-controlling interests, both the new Canadian GAAPrecommendations and IFRS-IASB allow the choice of whether or not to recognizethe fair value of goodwill attributable to non-controlling interests on anacquisition-by-acquisition basis.

 

Measuring business acquisitionsat fair value will, among other things, result in:

 

·                  acquisition costs being expensed;

 

·                  acquisition-created restructuringcosts being expensed;

 

·                  contingent consideration, that isaccounted for as a financial liability, being measured at fair value at thetime of the acquisition with subsequent changes in its fair value beingincluded in determining the results of operations; and

 

·                  changes in non-controlling ownershipinterests subsequent to the parent company’s acquisition of control, and notresulting in the parent company’s loss of control, being accounted for ascapital transactions.

 

Effective January 1, 2009,the Company early adopted the new recommendations and did so in accordance withthe transitional provisions; the Company would have otherwise been required toadopt the new recommendations effective January 1, 2011.

 

Whether the Company will bematerially affected by the new recommendations will depend upon the specificfacts of business combinations, if any, occurring subsequent to the Company’sadoption of the new recommendations. The Company’s consolidated financialstatements will, however, be subject to a small number of retrospectivelyapplied non-controlling interest-related presentation and disclosure changes:

 

·                  the Consolidated statements offinancial position will recognize non-controlling interest as a separatecomponent of shareholders’ equity; and

 

·                  the Consolidated statements ofincome and other comprehensive income will present the allocation of net incomeand other comprehensive income between the Company’s shareholders and non-controllinginterests rather than reflecting the non-controlling interest in the results ofoperations as a deduction in arriving at net income and other comprehensiveincome.

 

Had these presentation anddisclosures changes been applied to the Consolidated statements of income andother comprehensive income for the year ended December 31, 2008, Netincome would have increased by $3 million, as illustrated in Note 2(e) ofthe Consolidated financial statements.

 

## **9.**              General outlook

## ** **

Outlook for the telecommunicationsbusiness in 2009

 

The following discussion isqualified in its entirety by the *Caution regarding forward-looking statements*atthe beginning of Management’s discussion and analysis, and *Section 10: Risks and risk management*.

 

In 2008, the Canadian telecomindustry generated estimated revenues of approximately $40 billion, with BellCanada and affiliated companies representing about 41% of the total. As thesecond largest telecommunications provider in Canada, TELUS generated $9.7billion in revenues in 2008, or approximately 24% of the total.

 

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Revenue in the Canadian telecommarket grew an by approximately 4.4% in 2008, consistent with the mid-point ofthe 3.5 to 5.5% growth experienced in recent years and higher than overall GDPgrowth. Wireless and enhanced data continued to be the focus of increasedinvestment and act as growth engines for the sector. Offsetting this growth wascontinued wireline industry weakness in voice service revenue, with declininglong distance and legacy data revenues.

 

TELUS’ continued focus onnational growth in wireless, data and IP, and the impact of a stronger Westerneconomy, were partially offset by wireline losses to cable telephony, resultingin 6.4% consolidated revenue growth. The Company expects competition in theCanadian telecommunications industry to remain intense in 2009 and 2010. Onecontributing factor is the re-emergence of BCE as a moderately leveraged,dividend-paying public operating company, following the December 2008termination of its pending sale to a consortium led by the Ontario TeachersPension Plan, which would have seen BCE become highly levered with debt andfocused on maximizing short-term cash flow.

 

It is expected that 2009 will bea challenging year from a macroeconomic perspective. The low positive growthcurrently forecast in Western Canada is expected to be more than offset bynegative growth in Central and Eastern Canada, leading to an overall negativeGDP growth forecast for the national economy. Given these and other factors,TELUS expects its revenue growth to moderate slightly in 2009 in the range of 4to 6%.

 

Wireless

 

The wireless industry continuedto experience robust growth with estimated 2008 year-over-year industry revenueand EBITDA growth of approximately 11% and 7%, respectively.

 

The Canadian industry continuesto represent a meaningful growth opportunity, due to a national penetrationrate that is lower than other developed countries because of structural andtiming differences. Penetration rates in many Western European countries havesurpassed 100%. Asian countries, such as Korea, are approaching 95%penetration. These rates are not exactly comparable to North America due tohigher-quality, lower-cost, fixed-rate local service, multiple subscriptionsbeing possible on one GSM handset in Europe and differences in postpaid andprepaid mix. The U.S. wireless industry is more comparable to Canada, with apenetration rate of approximately 87%, a 22 percentage point differencerelative to Canada, which can be attributed in part to a two-year head start inthe U.S. Canada continues to grow strongly with almost 1.6 million new subscribersin 2008 and an estimated 4.6 point increase in penetration to approximately65%, with a penetration gain of approximately 4.5 percentage points expected in2009. This forecast growth is supported by the view that wireless services areless likely than many other consumer expenditures to be eliminated in aneconomic downturn.

 

A key driver of wireless growthcontinues to be the increased adoption and usage of data services such as textand picture messaging, mobile computing, applications, gaming, ringtones,music, video downloads, mobile TV and an expanded range of commerciallyavailable smartphones. To capture this opportunity, Canadian wireless providerscontinue the roll-out of faster, next generation high-speed wireless networks,with TELUS committing to build a next generation wireless network in 2009 forlaunch by early 2010. In 2008, wireless data in Canada represented an estimated16% of industry ARPU. This compares to approximately 38% in Asia-Pacific, 22%in Europe and 24% in the U.S., indicating an ongoing growth opportunity.

 

In addition to TELUS, Rogers andBell, mobile virtual network operators such as Virgin Mobile, Videotron Ltd.and President’s Choice remain active in the market. In addition, wirelessincumbents have become increasingly competitive with their separately brandedbasic or discount service offerings. In this cost-conscious and growing market,Bell and Rogers continue to aggressively promote and price their respectiveSolo and Fido brand offerings. In March 2008, TELUS successfully began thelaunch of its Koodo Mobile branded basic service, focused on talk and text, tomore effectively and efficiently compete in this market segment.

 

Competition in the Canadianwireless market is expected to remain intense due to continued aggressivecompetition from basic service offerings, and new entrant wireless serviceproviders as a result of Industry Canada’s AWS spectrum auction. The auctionconcluded in mid-2008, raising $4.25 billion for the federal government, or upto three times more than initially anticipated. Consistent with TELUS’ nationalgrowth strategy focused on wireless and data, the Company acquiredapproximately 16 MHz of spectrum across Canada for $882 million. This furtherstrengthened TELUS’ ample spectrum position and provides capacity for theintroduction of future 4G service offerings. As a result of government policyto reserve spectrum for new wireless entrants, a number of potential newentrants acquired spectrum in various regions of Canada, although no potentialnational provider emerged. TELUS expects to face new entrant competitionbeginning in late 2009 at the earliest and most likely in 2010. However, thenumber and long-term viability of new entrants in various markets remainuncertain because of, amongst other things, the significant amount of capitalneeded for build-out requirements, the high cost of the spectrum and launchingnew brands and services, weak capital market conditions, and restrictions onforeign investment.

 

Longterm evolution (LTE) is quickly emerging as the global standard for 4G wirelesstechnology. In a 2008 report prepared for the UMTS Forum, Analysys Researchforecast more than 400 million LTE subscribers worldwide by 2015. To

 

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enablethe optimal transition to a 4G LTE wireless network, TELUS is building a nextgeneration wireless service based on high-speed packet access (HSPA) technologywith a national service launch expected by early 2010. This enhancement ofTELUS’ mobile network complements the Company’s existing wireless networkportfolio, which includes code division multiple access (CDMA) and Mike (iDEN)networks, providing access to a nationwide 3G high-speed EVDO network and theindustry-leading Push To Talk network, respectively. The new network isexpected to allow TELUS to continue providing customers with the widest choiceof wireless solutions to best meet their needs.

 

Given TELUS’ high and increasingexposure to wireless (48% of 2008 consolidated revenue), strong establishedbrands, and consistent focus on leading-edge, value-added products andprofitable subscriber growth, TELUS is well positioned to benefit from ongoinggrowth in the Canadian wireless market.

 

Wireline

 

In contrast to wireless,expectations for the mature wireline segment are more modest. The wirelinetelecom landscape is expected to remain very competitive in 2009 as traditionalservices (such as local and long distance telephony) are expected to continuedeclining due to consumer migration to wireless and VoIP services. Canada’s fourmajor cable-TV companies had almost 2.6 million telephony subscribers at theend of 2008, up by close to 700,000 from 2007, or an estimated 21% consumermarket share nationally. TELUS’ total line losses of 3.6% in 2008 comparefavourably to North American peers, partly due to growth in TELUS businesslines in Central Canada mitigating residential line erosion in the Company’sincumbent regions. The long distance market faces further pressure, due tocontinued aggressive pricing and promotion of voice packages by VoIP providers,and migration to other technologies such as e-mail.

 

To help alleviate thecompetitive challenges in the traditional wireline segment, TELUS’ FutureFriendly Home strategy is positioned to grow wallet share with consumers, whileenhancing retention and loyalty through multiple service offerings. TELUS iscontinuing the roll-out of higher speed Internet services and TELUS TV,including new products such as HD TV and PVRs, to markets in B.C., Alberta andEastern Quebec. Notably, Internet connectivity and basic home entertainmentservices are viewed as fairly non-discretionary and are expected to bereasonably resilient in an economic downturn. Combined with wireline local andlong distance, wireless and high-speed Internet services, TELUS is increasinglyoffering bundled products to achieve competitive differentiation with anintegrated set of services that provides customers more freedom, flexibilityand choice. At the same time, cable-TV companies have shown a greater abilityto increase pricing without regulatory oversight, and are continuing to rollout higher-speed Internet services, Internet telephony and digital cable-TVservices to fuel their growth.

 

In 2007, the federal governmentmoved the telecommunications industry towards a more open and deregulatedwireline environment by directing the CRTC to grant residential local exchangeforbearance in markets with three independent facilities-based competitors thatserve at least 75% of residential lines, and business forbearance in marketswith two facilities-based competitors that serve at least 75% of businesslines. Approvals for forborne exchanges continued in 2008, providing TELUS andother incumbent telecom companies enhanced competitive flexibility in pricing,promotions and bundling of services. By the end of 2008, the majority ofresidential and business markets across Canada were forborne from regulation,and the CRTC eliminated for the incumbents the majority of retailquality-of-service indicators as well as restrictions on winback offers andpromotions.

 

The opportunities presented by forbearance,such as bundled product offerings, are heavily contingent on TELUS implementingits new integrated billing and client care platform that consolidates multiplelegacy systems. Anticipated benefits include increased customer serviceefficiencies — greater flexibility, differentiation, enhanced marketingopportunities and accuracy — as well as future expense savings. TELUS hassuccessfully converted the vast majority of consumer wireline customers inAlberta and British Columbia to the new system, and intends to convert businesscustomers, and those outside of B.C. and Alberta, in the coming years.

 

Inthe business market, the convergence of IT and telecom, facilitated by theubiquity of Internet protocol (IP), continues to shape competitive investments.Telecoms are providing network-centric managed applications, while IT serviceproviders attempt to bundle network connectivity with their software as aservice (SaaS) offerings. In addition, manufacturers are bringing all-IP andconverged (IP plus legacy) equipment to market, enabling a steady migration toIP-based solutions. The development of IP-based platforms providing combined IP voice, dataand video solutions creates cost efficiencies to compensate, in part, formargin pressures from the migration from legacy to IP-based services. At the sametime, this opens new opportunities for integrated solutions that have greaterbusiness impact than traditional telecom services. TELUS is aggressivelypursuing this opportunity with a series of solutions targeting specifichigh-value segments, including the industry verticals of healthcare, financialservices, public sector, and energy, as well as small and medium-sizedbusiness.

 

Theaddressable market for healthcare, for example, is approximately $3.5 billionand is forecast to grow at 7% annually over the next several years. Recognizingthis opportunity, in 2008 TELUS acquired and integrated Emergis, and placed allTELUS healthcare solution assets under the newly launched TELUS HealthcareSolutions brand. Over three years, TELUS plans to invest more than $100 millionin healthcare solutions, ranging from electronic health records

 

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managementand health insurance processing to pharmacy management and home care. While thecurrent challenging economic environment is expected to impact the businesssegment, it also means that many organizations will be looking for new data andIP-based solutions to support efficiency initiatives. In addition, increasedinfrastructure-related spending, as a result of fiscal stimulus efforts byvarious levels of government, will impact other sectors such as healthcare andthe public sector. For instance, the January 2009 federal budget allocated$500 million to help attain the goal of providing 50% of Canadians with anelectronic health record by 2010.

 

Themedium-sized business market, often viewed as underserved because it looks forbig-business solutions at close to small-business price points, is forecast tobe a sustained growth opportunity. TELUS is investing in a range of affordablesolutions for this segment, including security, videoconferencing, and managedhosting solutions for everything from e-mail to web applications. In the smallbusiness market, TELUS has countered increased cable-TV company competition bycreating a small business solution platform called TELUS Business One ®, whichincludes connectivity (data and voice, wireline and mobility), security, audioand video conferencing, and other IP-based tools.

 

Despite an expected challengingeconomic climate and competitive environment in 2009, TELUS believes itsconsistent strategic focus on providing a full suite of valuable and reliablecommunications services; delivering differentiated, premium national business solutionsin data and IP; exposure to growth services such as wireless, data and IPincluding high-speed Internet and TELUS TV; and the continued enhancement ofnational wireless and broadband networks, solidly position TELUS for continuedgrowth in the years ahead. At the same time, TELUS’ management is particularlyfocused on monitoring macroeconomic and regional trends in 2009 to ensuretimely adjustments can be made to maintain profitability, cash flow andfinancial strength.

 

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## **10.**       Risksand risk management

## ** **

*TELUS’ risk and control assessment process*

 

 

TELUS uses a three-level enterprise risk andcontrol assessment process that solicits and incorporates the expertise andinsight of team members from all areas of the Company. TELUSinitially implemented its three-level risk and control assessment process in2002 and tracks multi-year trends for various key risks and control environmentperceptions across the organization.

 

*TELUS’ definition of business risk*

 

TELUSdefines business risk as the degree of exposure associated with the achievementof key strategic, financial, organizational and process objectives in relationto the effectiveness and efficiency of operations, the reliability of financialreporting, compliance with laws and regulations, and the safeguarding of assetswithin an ethical organizational culture.

 

TELUS’enterprise risks are largely derived from the Company’s business environmentand are fundamentally linked to TELUS’ strategies and business objectives.TELUS strives to proactively mitigate its risk exposures through rigorousperformance planning and effective and efficient business operationalmanagement. Residual exposure for certain risks is mitigated throughappropriate insurance coverage where this is judged to be efficient andcommercially viable.

 

TELUS strives to avoid takingon undue risk exposures whenever possible and ensure alignment with businessstrategies, objectives, values and risk tolerances.

 

**Enterprise risk and control assessment process**

 
| Level one   |   | Annual risk and  control assessment

 

Key inputs into  this process include interviews with senior managers, data and updates from  TELUS’ ongoing strategic planning process and the results of an annual  web-enabled risk and control assessment survey. The survey is based on the  COSO (Committee of Sponsoring Organizations of the Treadway Commission)  enterprise risk management and internal control frameworks and is widely  distributed to TELUS’ management leadership team (all executive  vice-president, vice-president and director level team members and a random  sample of management). Survey responses were received from 1642 individuals  in 2008.

 

Additionally,  TELUS’ assessment process incorporates input from recent internal and external  audits, as well as input from management’s SOX 404 (*Sarbanes  Oxley Act*of 2002) internal control over financial reporting  compliance activities. Key enterprise risks are identified, defined and  prioritized, and risks are classified into one of seven risk categories.

 

Results of the  annual risk and control assessment drive the development of TELUS’ annual  internal audit program and are presented to senior management and the Audit  Committee. Risk assessments are also incorporated back into the Company’s  strategic planning processes and shared with the Board. |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Level two   |   | Quarterly risk  assessment review

 

TELUS conducts a  quarterly risk assessment review with key internal stakeholders across all  business units to capture and communicate the dynamically changing business  risks, identify key risk mitigation activities and provide ongoing updates  and assurance to the Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Level three |   | Granular risk  assessments

 

TELUS conducts  granular risk assessments for specific audit engagements and various risk  management, strategic and operational initiatives (e.g. project,  environmental management, safety, business continuity planning, network and  IT vulnerability, and fraud and ethics risk assessments). The results of the  multiple risk assessments are evaluated, prioritized, updated and integrated  into the key risk profile throughout the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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Thefollowing sections summarize the principal risks and uncertainties that couldaffect TELUS’ future business results going forward, and TELUS’ associated riskmitigation activities.

 

### **10.1Competition**

### ** **

*Aggressivecompetition may adversely affect market shares, volumes and pricing*

 

TELUS faces intense competitionacross all key business lines and market segments, including consumer, smalland medium-sized businesses (SMB), and the large enterprise market.

 

Technological advances haveblurred the traditional boundaries between broadcasting, Internet andtelecommunications. Cable-TV companies continue to expand offerings of basicvoice and enhanced phone services resulting in intensified competition in theresidential and certain SMB, local access, long distance, and high-speedInternet access (HSIA) markets. Furthermore, as a result of the recent AWSspectrum auction, TELUS expects to face new wireless competition in the futurefrom new carriers, including cable-TV operators. Overall, industry pricingpressure and customer acquisition efforts have intensified across most productand service categories and market segments, and this is expected to continue inthe face of economic uncertainty.

 

*Risk mitigation, general:*Recent Canadian Radio-television andTelecommunications Commission (CRTC) decisions approving wireline deregulationhave provided TELUS with improved flexibility to respond to intensifyingcompetition (see *Section 10.3 Regulatory*).Active monitoring of competitive developments in product and geographic marketsenables TELUS to rapidly respond to competitor offers and leverage the Company’sfull suite of integrated solutions and national reach. TELUS continues toexpand its TELUS TV offering in its incumbent territories in order to provide apremium television experience and enhance its bundles to better addresscustomer needs and respond to cable-TV offerings. In order to offset increasingcompetitive intensity and losses in its incumbent areas, TELUS continues toexpand into and generate growth in non-incumbent markets in Central Canada withits business services and mobility offerings. In addition to expandingservices, TELUS also continues to actively pursue the most competitive coststructure possible. With the operational integration of its wireless andwireline teams, TELUS is now better aligned across distribution channels andproduct and service roadmaps, and can provide more integrated anddifferentiated offerings and joint account planning.

 

*Wirelinevoice and data*

 

Competition is expected toremain intense from traditional telephony, data, IP and IT service providers,as well as from new voice over Internet protocol (VoIP) focused entrants.Competitors are focusing on both business and consumer markets.

 

The industry transition fromlegacy voice infrastructure to IP telephony, and from legacy data platforms toEthernet, IP virtual private networks (VPN), multi-protocol label switching(MPLS) IP platforms and IP-based service delivery models, continues at a robustpace. Legacy data revenues and margins continue to decline. This decline hasbeen only partially offset by increased demand and/or increased migration ofcustomers to IP-based platforms. IP-based solutions are also subject todownward pricing pressure, lower margins and technological evolution. Significantcapital investments in wireline infrastructure will be required to facilitatethis ongoing transition process for all traditional incumbent local exchangecarrier (ILEC) entities including TELUS.

 

*Wirelinevoice and data — Business*

 

In the business market,price-discounted bundling of local access, wireless and advanced data and IPservices has evolved to include web-based and e-commerce services, as well asother IT services and support. Non-traditional competitors such as Microsofthave entered the telecom space through new products such as UnifiedCommunications, which provides the ability to redirect and deliver, in realtime, e-mail, voice and text messages from a variety of telecom and IT systemsto the device nearest to the intended recipient. With this broader bundling oftraditional telecom services with IT services, TELUS increasingly facescompetition from pure Internet and information technology hardware, softwareand business process/consulting related companies. Cable-TV companies havebegun to target the SMB market with their VoIP services. The result is thattraditional and non-traditional competitors are now focused on providing abroad range of telecommunications services to the business market, particularlyin the major urban areas.

 

*Risk mitigation in the business wirelinemarket:*TELUS continues to increase its capabilities in the overall businessmarket through a combination of strategic acquisitions and partnerships, afocus on priority vertical markets (public sector, healthcare, financialservices and energy), expansion of strategic solution sets in the enterprise market,and a mass modular approach in the SMB market (including services such as TELUSBusiness One). Through the Emergis acquisition and launch ofTELUS Health Solutions, TELUS can now leverage systems and proprietary softwareto extend the Company’s footprint in healthcare, benefit from the investmentmade by government in eHealth, pursue the transformation of the CanadianPharmacy Benefit model and cross-sell more traditional telecom products andservices. TELUS is also

 

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focusedon engaging in appropriate large longer-term deals that best leverage theCompany’s capital investments and capabilities.

 

*Wirelinevoice and data — Consumer*

 

In the consumer wireline market,cable-TV companies and other competitors encounter minimal regulation andcontinue to combine a mix of residential local VoIP, long distance, HSIA and,in some cases, wireless services into one bundled and/or discounted monthlyrate, along with their traditional broadcast or satellite-based TV services. Inaddition, cable-TV companies continue to increase the speed of their HSIAofferings. To a lesser extent, other non-facilities-based competitors offerlocal and long distance VoIP services over the Internet and resell HSIAsolutions. Erosion of TELUS’ residential network access lines (NALs) isexpected to continue from this competition, as well as ongoing technologicaland wireless substitution. Competitors are anticipated to capture a majority ofthe share in growth marketplace opportunities; thus, access line associatedrevenues, including long distance, can be expected to continue to decline.Although the HSIA market is maturing, subscriber growth is expected to continueover the next several years. With a more mature HSIA market, and the potentialfor higher speed Internet offerings from competitors, TELUS may be constrainedin its ability to maintain market share in its incumbent territories, becauseof the amount and timing of capital expenditures associated with maintainingcompetitive network access speeds.

 

*Risk mitigation in the consumer wirelinemarket:*TELUS continues to expand its own broadband infrastructure, in bothcoverage area and increased speed of service, to enter new market segments suchas video, and enhance current services. TELUS has initiated a targetedneighbourhood commercial launch of TELUS TV in Edmonton, Calgary, FortMcMurray, Grande Prairie, Vancouver and Lower Mainland and Rimouski areamarkets, with additional serving areas in B.C., Alberta, and Eastern Quebec targetedfor 2009. TELUS TV helps TELUS counter the threat from the cable-TV competitionin its incumbent markets, and to retain and grow revenues with a bundledoffering of local and long distance telephony, HSIA, TV entertainment servicesand wireless.

 

*Broadcasting*

 

The Company offers TELUS TV in select areas of B.C., Alberta, andEastern Quebec, as noted above, and continues targeted roll-outs to new areasin order to generate new revenues and gain the ability to create new servicebundles for enhanced competitiveness and customer retention.  TELUS TV is an IP-based, fullydigital TV service offering more than 200 broadcast TV channels, Pay Per View,personal video recorder (PVR), and Video on Demand services similar to thoseoffered by direct competitors Shaw Cable, StarChoice and Bell TV. TELUS alsooffers HD capability in select areas through the deployment of ADSL2+technology. Though still at an early stage of roll-out, TELUS expects its HD TVservice to increase penetration in 2009 as additional ADSL2+ build-outs expandTELUS’ addressable market. While IP TV provides significant interactivity andcustomization advantages relative to both cable and satellite, there can be noassurance that TELUS TV will be successful in achieving its plans of obtaininga sizable share of the TV services market or that implementation costs orprojected revenues for TELUS’ television service will be as planned. TELUS willcontinue to monitor the situation and may explore alternative distributionchannels for entertainment services.

 

*Risk mitigation:*IP TV provides TELUS with uniquecompetitive advantages relative to analog cable-TV, such as time-shiftedprogramming flexibility, on-screen caller ID, limited web-surfing and anall-digital, broad selection of channels. TELUS TV also provides the Companywith the ability to offer customers a bundled product, incorporating local andlong distance telephony, HSIA, TV and wireless services. However, IP TV isstill at a relatively early stage of development and adoption. Per-unit capitaland operating costs are expected to decline with technological advances and asTELUS increases scale. Additionally, TELUS continues to explore other optionsfor enhancing its service bundles relative to its TV-focused competitors.

 

*Wireless*

 

Competition in the Canadianwireless market intensified with the launch of wireless number portability(WNP) in March 2007, and the proliferation and promotion of additionaldiscount brands. WNP removed a barrier to switching providers for many wirelesssubscribers, and the addition of new brands has all carriers activelyintroducing price promotions to attract new customers from other carriers andretain their customer base. TELUS has experienced modestly higher churn ratessince the introduction of WNP. The initial post-WNP phase of pent-up demand toswitch has subsided, but churn rates may be permanently higher in the future.

 

The AWS spectrum auction in May 2008resulted in eight new competitors conditionally acquiring spectrum in separateand overlapping regions, collectively covering most markets in Canada. Newentrants are expected to begin offering services in late 2009, but may facefurther delays because of the currently challenged financing environment. (See *Section 10.3 Regulatory.*) To win market share, strategiesof potential competitors are expected to include price discounting relative toincumbents and increased competition at the distribution level. TELUS expectsthat competition from new entrants will put additional pressures on margins.However, with its robust wireless networks, including a new high-speed

 

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packet access (HSPA) networkbeing built under a network sharing agreement, and a new basic brand andservice, TELUS expects to be well-positioned to respond to the arrival of thesenew entrants.

 

To compete more effectively inserving various customer segments, TELUS launched a basic brand and servicecalled Koodo Mobile in March 2008. Koodo Mobile has been successful todate, positively affecting subscriber loading. TELUS anticipates averagerevenue per subscriber unit (ARPU), cost of acquisition (COA) and cost ofretention (COR) pressures as competitors increase subsidies for handsetsparticularly for smartphones, lower airtime and wireless data prices and otherincentives to attract new customers. As Canadian wireless penetrationincreases, industry net loading is expected to shift towards value brands andprepaid products.

 

Wireless competition has alsointensified due to an increased emphasis on multi-product bundles and new dataplans. This emphasis could pressure TELUS’ ARPU and increase its churn and COA.TELUS’ Mike Push To Talk (PTT) service also faces increasing competition, dueprimarily to the emergence of e-mail and wireless data products as a substitutefor the dispatch and fleet management applications of Mike PTT.

 

In October 2008, TELUS announced its commitment to long-termevolution (LTE) as the technology for its fourth generation (4G) wirelessbroadband network. As an interim step, TELUS began buildinga national next generation wireless network based on HSPA technology withservice expected to be launched by early 2010. The Company also announced ithas entered into an HSPA network sharing agreement with Bell Canada. This agreement builds on andenhances an agreement signed in 2001 and is expected to enable TELUS to lowerthe cost, accelerate deployment on a national basis, optimize cell-siteutilization, and maximize potential operating efficiencies.

 

Currently, TELUS operates CDMAand iDEN wireless networks. These technologies are estimated to represent lessthan 20% of global wireless subscribers. TELUS’ global system formobile communication(GSM) competitor, Rogers, currently enjoys advantages in breadth of handsetselection, earlier availability of certain devices and lower handset costs.With TELUS’ announced HSPA build, these advantages may decrease beginning inearly 2010.

 

*Competitionfrom adjunct wireless technologies may increase*

 

While adjunct wirelesstechnologies, like fixed WiMax and Wi-Fi (wireless fidelity), are continuing todevelop, their associated economic viability remains unproven. Regardless,increased competition is expected through the use of licensed and/or unlicensedspectrum to deliver higher-speed data services. At the end of November 2008,Industry Canada granted a licence to Craig Wireless to move its fixed servicein Vancouver to mobile, consistent with this policy. Look Communicationsannounced that it was looking to sell similar spectrum in Ontario and Quebec.These technologies offer portable data capabilities that can overlap in someinstances with mobile 3G such as EVDO. (See *Section 10.2Technology.*) TELUS considers this Craig Wireless licence change tobe a sign that the 2.5/2.6 GHz band may increase competitive intensity inthe mobile market.

 

Certain non-traditional telecomplayers, such as municipalities, may contemplate launching fixed wirelessventures in urban and suburban locations, as has been the case in the UnitedStates. Though many municipal Wi-Fi network initiatives have failed to gainmeaningful share in the marketplace, there can be no assurance that new orexisting services offered by TELUS will be competitive with such fixed wirelessservices, or will be available on time, or that TELUS will be able to chargeincrementally for the services.

 

*Risk mitigation in wireless markets:*TELUS launched its basic brand,Koodo, to compete with other basic brands and gain market share in Canada.TELUS has a strong premium brand, a robust EVDO network, and an expectednational HSPA footprint by early 2010 to respond to increasing competition.TELUS intends to continue the marketing and distribution of innovative anddifferentiated wireless services; investing in its extensive network; evolvingtechnologies when deemed prudent; and acquiring spectrum, as appropriate, tofacilitate service development and profitable expansion of the Company’ssubscriber base. In the May 2008 AWS auction, TELUS acquired sufficientspectrum assets to support long-term growth. TELUS continues to monitorwireless technology developments and takes a proactive approach to producttesting and development.

 

### **10.2Technology**

### ** **

****Technology is a key enabler for TELUS and itscustomers, however, technology evolution brings risks, uncertainties andopportunities. TELUS is vigorous in maintaining its short-term and long-termtechnology strategy to optimize the Company’s selection and timely use oftechnology, while minimizing the associated costs, risks and uncertainties. Thefollowing identifies the main technology risks and uncertainties and how TELUSis proactively addressing them.****

 

*Evolvingwired broadband access technology standards may outpace projected accessinfrastructure investment lifetimes*

 

The technology standards forbroadband access over copper loops to customer premises are evolving rapidly.This evolution enables higher broadband access speeds and is fuelled by userappetite for faster connectivity, the threat of increasing competitorcapabilities and offerings, and the desire of service providers like TELUS tooffer new services, such 

 

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as IP TV, that require greaterbandwidth. In general, the evolution to higher broadband access speeds isachieved by deploying fibre further out from the central office, thusshortening the copper loop portion of the access network and using faster modemtechnologies on the shortened copper loop. However, new access technologies areevolving faster than the traditional investment cycle for accessinfrastructure. The introduction of these new technologies and the pace ofadoption could result in increased requirements for capital funding notcurrently planned, as well as shorter estimated useful lives for certainexisting infrastructure, which would increase depreciation expenses.

 

*Risk mitigation:* TELUS actively monitors thedevelopment and carrier acceptance of competing proposed FTTx standards (fibreto the Home, Curb, Pedestal or Neighbourhood). Oneor more of these fibre-based solutions may be a more practical technology todeploy in new greenfield neighbourhoods or multiple-dwelling units than thecurrent copper loops. In addition, TELUS is exploring business models for theeconomical deployment of fibre-based technologies in areas currently connectedby copper.

 

In 2005, TELUS began shorteningcopper loops using a fibre to the neighbourhood (FTTN) access architecture bydeploying remote digital subscriber line access multiplexers (DSLAMs) atextended reach access (ERA) sites. At this time, TELUS is deploying ADSL2+technology, a generation of ADSL technology that enables link rates at up to 24megabits per second (Mbps) to the customer premises, compared with up to8 Mbps for ADSL. ADSL2+ technology is backward-compatible with ADSL and takesadvantage of TELUS’ investments in ERA copper/fibre access infrastructure andin the installed base of ADSL modems. In 2008, TELUS anticipated starting thedeployment of very high bit rate digital subscriber line (VDSL2) and VDSL2bonding technologies in certain urban areas to extend the capabilities of thecopper loops to at least double previous speeds, up to 80 Mbps. However,chipset delays have resulted in the delay of VDSL2 introduction until 2009.

 

In 2007, TELUS began partneringwith developers of multiple-dwelling units (MDUs) to build future-friendlybuildings. In these greenfield buildings, TELUS placed fibre to the buildingand deployed category 5E data cables within the building to deliver up to100 Mbps services to customers in these buildings. In 2008, TELUS alsocompleted field trials of FTTH technologies utilizing standards-based gigabitpassive optical network (GPON) technology.

 

The evolution of these accessarchitectures and corresponding standards, enabled with Quality of Servicestandards and network traffic engineering, all support the TELUS FutureFriendly Home strategy to deliver IP-based Internet, voice and video servicesover a common broadband access infrastructure.

 

*IP-basedtelephony as a replacement for legacy analog telephony is evolving and costsavings are uncertain*

 

TELUS continues to monitor theevolution of IP-based telephony technologies and service offerings and isdeveloping and testing a consumer solution for IP-based telephony overbroadband access in accordance with TELUS’ strategy and standards. Thissolution could provide additional telephone services over the same line aslegacy analog telephone service or could replace the legacy analog telephoneservice. One of the realities of VoIP in the consumer space is that the actualstate of technology developed to inter-work telephony, video and Internetaccess on the same broadband infrastructure is in its infancy and there arerisks and uncertainties to be addressed, such as ensuring all services can bedelivered simultaneously to the home (and to different devices within the home)with uncompromised quality. These issues are exacerbated when the exchange ofinformation is between service providers with different broadbandinfrastructures.

 

A long-term technology strategyis to move all services to IP to simplify the network, reduce costs and enableadvanced Future Friendly Home services. Pursuing this strategy to its fullextent would involve transitioning TELUS’ standard telephone service offeringto IP-based telephony and phasing out legacy analog-based telephone service. Tothis point, TELUS’ legacy voice network infrastructure could be simplified ifregular analog telephone lines were discontinued in favour of digital-onlybroadband access lines supporting all services including telephony, Internetand video. This would, for example, allow inexpensive high-bandwidthconventional Ethernet to be used as the broadband access technology in themultiple-dwelling unit model. However, digital-only broadband access may not befeasible or economical in many areas for some time, particularly in rural andremote areas. TELUS needs to support both legacy and broadband voice systemsfor some time and, therefore, is expected to continue to incur costs tomaintain both systems. There is a risk that investments in broadband voice maynot be accompanied by decreased costs of maintaining legacy voice systems.There is also the risk that broadband access infrastructure and correspondingIP-telephony platforms may not be in place in time to avoid some re-investmentin traditional switching platforms to support the legacy public switchedtelephone network access base in certain areas, resulting in some investment inline adaptation in non-broadband central offices.

 

*Risk mitigation:*TELUS continues to monitor andconduct trials of IP-based voice technologies to better assess their technicalapplicability and evolving cost profiles, as well as to determine theappropriate timing for implementation by service area in line with TELUS’commitments to the CRTC and its customers. TELUS is making investments in FTTNtechnologies and access technologies that enable a smoother future evolution ofIP-based telephony. TELUS is also working with manufacturers to optimize theoperations and cost structure of analog systems.

 

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*The convergence in a commonIP-based application environment for telephony, Internet and video is complex*

 

Traditionally the technology and systems associated with telephony,Internet and video were different from each other and provided littleopportunity for common platforms for cost savings and little flexibility tointegrate media, services and service development environments. The convergencein a common IP-based application environment, carried over a common IP-basednetwork, provides opportunity for cost savings and for the rapid development ofmore advanced services that are more flexible and easier to use. Further, theglobal standards for drawing together classic wireline and wireless servicesinto a combined architecture using an IP multimedia subsystem are beingactively ratified. However, the transformation from individual traditional silosystems and architectures to a common environment is very complex.

 

TELUS has commercially launched an IP TV system, called TELUS TV. In2008, TELUS launched HD TV for both broadcast and VOD content as well as PVRtechnologies. TELUS TV utilizes middleware designed specifically for videodelivery. The middleware is designed to allow complex signalling communicationbetween application software and system hardware in the network, and in theset-top box in the home. Given that IP TV is in an early stage of development,there are potential quality and reliability risks, and risk of obsolescencewith middleware technology.

 

*Risk mitigation*: TELUS has the ability, if advantageous ornecessary, to switch middleware without disruption to its TV offering in themarketplace. TELUS is also mitigating this risk through modular architectures,lab investments, partnering with system integrators where appropriate, andusing hardware that is common to most other North American IP TV deployments.TELUS is striving to ensure that its IP TV deployment is part of an openframework that will fit into the overall transformation strategy once standardsare ratified and the actual implementations have stabilized, particularly withthe set-top box. In addition, TELUS is active in a number of standards bodiessuch as the MEF and IP Sphere to ensure its IP infrastructure strategyleverages standards-based functionality to further collapse and simplify theTELUS networks.

 

*Support systems will increasinglybe critical to operational efficiency*

 

TELUS currently has a very large number of interconnected operationaland business support systems, and the complexity is increasing. This is typicalof incumbent telecommunications providers that support a wide variety of legacyand emerging telephony, mobility, data and video services. The development andlaunch of a new service typically requires significant systems development andintegration. The associated developmental and ongoing operational costs are asignificant factor in maintaining competitive position and profit margins.TELUS is proactive in evolving to next generation support systems. As nextgeneration services are introduced, they should be designed to work with bothlegacy and next generation support systems, which introduces uncertainty withrespect to the costs and effectiveness of the solutions and the evolution.

 

*Risk mitigation:*In line with industry best practice, TELUS’approach is to separate the business support systems from the operationalsupport systems and underlying network technology. The aim is to decouple theintroduction of new network technologies from the services sold to customers.This should allow TELUS to optimize network costs while limiting the impact oncustomer services and to facilitate the introduction of new services byremoving, where possible, any development dependency on the operational supportsystems. In addition, TELUS is an active participant in the TeleManagementForum that is working to develop standard industry-defined modules in order toreduce cost through scale and increase adoption through scope. TELUS hasestablished a next generation OSS-BSS (operations support system — businesssupport system) framework to ensure that, as new services and technologies aredeveloped, they are part of the next generation framework to ease theretirement of legacy systems in accordance with TeleManagement Forum’s NextGeneration Operations Systems and Software (NGOSS) program.

 

*Restructuring of equipmentvendors may impact the services and solutions TELUS provides*

 

TELUS has a number ofrelationships with equipment vendors, which are important to supplying theservices and solutions TELUS provides to its retail and business customers.TELUS faces the risk that some equipment vendors may experience businessdifficulties, may not remain viable or may have to restructure theiroperations, which could impact their ability to support all of their productsin future. This may negatively impact the services and solutions TELUSprovides.

 

In January 2009, Nortel Networks filed for creditor protection,which was soon approved by the Ontario Superior Court, shielding the companyfrom creditors and lawsuits while it attempts to restructure. Nortel hasadvised TELUS that it does not expect this process to impact its normal,day-to-day operations and has assured the Company that maintenance contracts inplace with TELUS will continue to be supported and Nortel will continue to performthe services and support under these agreements without interruption. Inaddition, TELUS sells/resells Nortel solutions to its business customers and asa result may be impacted.

 

*Risk mitigation:* TELUS planned for this possibility in terms offuture growth, maintenance and support of existing Nortel equipment andservices. TELUS has a comprehensive contingency plan for multiple scenariosthat might be realized if the situation changes, including exposure to multiplesuppliers, and ongoing strong vendor relations. TELUS has selected NokiaSiemens Networks and Huawei Technologies as vendors for its next generationHSPA network build occurring in 

 

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2009 and 2010. There can be no guarantee that the outcomeof the Nortel restructuring will not affect the services that TELUS provides toits customers, or that TELUS will not incur additional costs to continueproviding services.

 

*CDMAand iDEN wireless technologies may become inferior and new HSPA network buildmay not go as planned*

 

The wireless industry continues to expand the deployment of secondgeneration (2G), third generation (3G) and emerging 4G technologies to deliverincreased data speeds required for many new wireless, IP and data services. TELUS’evolution to next generation wireless technologies involves services anddevices that meet the requirements of the Company’s current and futuresubscriber base.

 

TELUS continues to support CDMA2000 3G wireless services on its digitalCDMA PCS (personal communication services) and cellular networks. TELUS hasdeployed technology enabling EVDO revision A (DOrA) services that were turnedup in most markets in 2007. While TELUS has enjoyed commercial success with theCDMA2000-based technologies, and believes the economies of scale for CDMA2000will continue for some time in the future, there can be no assurance that theseeconomies of scale will continue without disruption. Further, there can be noassurance that the CDMA2000 path will continue to mature beyond DOrA intocapabilities that will effectively compete with the emerging UMTS/HSPA path interms of speeds and device types.

 

*Implementation of HSPA and 4G networktechnologies and systems*: TELUS and Bell Canada havepreviously announced a joint HSPA network build with service expected by early2010, demonstrating TELUS’ commitment to a technology path that provides anoptimal transition to 4G LTE. Though this agreement builds the foundation forreducing capital and operating costs, there is no limitation on either partyfrom building further network infrastructure to meet future and changingbusiness requirements. Accordingly, there is the risk that TELUS’ futurecapital expenditures may be higher than those recorded historically andexpected for 2009.

 

In addition, the expected timing andcompletion of the HSPA network are subject to various risks and uncertainties,including vendor performance and delivery related to completion of the networkbuild and sharing agreement with Bell Canada; risks of relying on Bell Canadato complete its respective HSPA network build-out on schedule; handsetincompatibility with network technology; roaming revenue risk from foreigncarriers; risks associated with the integration of billing and IT systems (see *Section 10.5 Process risks*); and other anticipated andunanticipated costs, expenses and risk factors relating to TELUS or affectingBell Canada or the selected suppliers. Other risks and uncertainties include: expectedbenefits, efficiencies and cost savings from the new HSPA or LTE technology orrelated services may not be fully realized; transition of services ortechnology will be more difficult and/or expensive than expected; new HSPAservices may lead to faster than expected transition from TELUS’ existingservices causing increased COA and COR expenses; and LTE may not emerge as theworldwide 4G technology standard as expected.

 

While TELUS plans to leveragethe HSPA economies of scale found in the family of Third Generation PartnershipProject (3GPP) technologies, there can be no assurance that these economies ofscale will be better or worse than past experiences with CDMA2000-basedtechnologies.

 

In 2008, CDMA2000 operators Verizon, MetroPCS, and Telstra announcedtheir intentions to migrate to LTE. Similarly, many HSPA operators such asAT&T, T-Mobile Germany, Vodafone, NTT DoCoMo and China Mobile haveannounced their intentions to migrate to LTE. Although LTE is part of thetechnology evolution of a mature HSPA platform deployed by over 50 operatorsworldwide, some operators seeking to deploy LTE could influence the diversionof resources from HSPA development by the vendor and operator communities.

 

TELUS’ Mike service is differentiated against current CDMA-based PTTservices in Canada in that Mike’s Direct Connect (iDEN PTT) has superior callset-up time and inter-call latency. With its Mike service and CDMA-basedInstant Talk service, TELUS remains the Canadian leader with the largest numberof subscribers using PTT. Notably, there is currently no GSM-based PTT servicein the Canadian market, but there is risk that one could be introduced in thefuture.

 

Sprint-Nextel, the largest single operator of the iDEN technology, haspublicly committed to improve and market the iDEN network for PTT-centriccustomers in the United States to 2012 and beyond. Sprint-Nextel announced thatit will utilize Q-Chat technology, developed by Qualcomm, to provide future PTTservices on its EVDO revision A (DOrA) CDMA network in addition to its PTTservices on the iDEN network. Sprint-Nextel is expected to promoteinteroperability between its iDEN PTT base and Q-Chat PTT service through agateway technology once the Q-Chat service is launched. While a strong iDENtechnology ecosystem has also developed at Nextel International outside of theU.S., there is no assurance that Sprint-Nextel will remain committed to iDENtechnology.

 

*Risk mitigation*: As common and continual practice, TELUSoptimizes capital investments to enable positive payback periods and strongflexibility to consider future technology evolutions. Certain capitalinvestments, such as towers, leasehold improvements and power systems, aretechnology agnostic. TELUS has chosen to invest in HSPA to offset the risk ofthe uncertain long-term competitiveness of CDMA and iDEN technologies. TELUSalso has a migration initiative underway to strategically move certain CDMA2000and Mike subscribers to high-speed data capable PCS services, thereby providingthe potential to increase utilization of data services and revenue stability. TELUSexpects to leverage the 

 

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economies of scale and handset variety with the HSPA device portfolio,while continuing to take advantage of both the CDMA and iDEN device portfolios.

 

By reaching an agreement with Bell Canada to jointly build out an HSPAnetwork, TELUS is better able to manage its capital expenditures and morequickly deliver a commercial network than it could otherwise accomplish. TELUS’continued roaming/resale agreements with Bell Canada are possible because bothcompanies have a similar mobile technology path and vendors, and an existingrelationship in this arena. TELUS’ continued partnership with Bell Canada isexpected to provide cost savings beyond the initial network build and flexibilityto invest in service differentiation.

 

TELUS maintains a close liaison with its network technology suppliersand operator partners to influence and benefit from developments in iDEN, CDMA,and HSPA technologies. By contracting TELUS’ suppliers to provide technologysolutions that are amenable to future advancements like LTE, TELUS can mitigatethe operational disruption during technology transitions. Fundamental to TELUS’strategy is the reuse and redeployment of application servers and network elementsthat are access-agnostic, such as messaging (voice and text), into the latestradio access technology such as HSPA. This enables TELUS to invest inradio-based technologies as they evolve and as required, without the need toreplace these application servers.

 

*Emerging wireless technologies represent both anopportunity and a competitive threat*

 

Wireless technologies and protocols continue to be developed andextended for a variety of applications and circumstances, such as the Instituteof Electrical and Electronics Engineers (IEEE) 802.xx suite of standards. Anumber of wireless technologies are capable of exploiting both licensed andunlicensed spectrum for fixed and future mobile applications. While TELUSconstantly reviews and examines such developments, and may from time to timechoose to utilize a number of these technologies, there can be no assurancethat these developments may not adversely impact TELUS in the future.

 

In particular, the emergence of new WiMax and Wi-Fi networks may have asignificant impact on traditional wireless services. Further, this may alsotrigger an accelerated incremental investment in next generation wirelessinfrastructures.

 

In recent years, TELUS and certain of its current and potentialcompetitors have acquired, through auction, regional radio spectrum licences inthe 3.5 GHz and 2.3 GHz frequency bands. This spectrum can be usedfor the deployment of high bandwidth wireless services utilizing fixed WiMax(802.16) wireless technology. WiMax is an emerging wide area wirelesstechnology standard that will allow high bandwidth services that could competewith 3G wireless services. Future mobile WiMax (802.16e) service could operatein 3.5 GHz and 2.3 GHz bands, though no current licence holders havecommercially deployed to date in those bands and there is no guarantee thatthese technologies will be commercially successful using those bands.

 

U.S. operator Sprint is expected to sell its WiMax business and mergeit with Clearwire. Under the newly formed company, Clearwire is deployingmobile WiMax (802.16e) in the 2.5 GHz spectrum band, largely marketed todate as an alternative connectivity service. In Canada, the same 2.5 GHzspectrum band is restricted to fixed and portable services only. There is noassurance that Canadian carriers with spectrum in this band cannot use2.5 GHz for mobility services through Industry Canada provisions or thatCanadian carriers will not deploy and market WiMax wireless services moreaggressively. In 2006, Industry Canada issued a policy that provides for a clawback of a portion of the 2.5 GHz band for auction when mobile service isimplemented in the band. *(See Section 10.3Regulatory.)* Inukshuk, a joint venture of Bell and Rogers withspectrum in this band, could upgrade to mobile WiMax (802.16e) once it maturesto offer capabilities similar to existing 3G networks. There can be noassurance that these emerging wireless technologies will represent a greateropportunity than threat for TELUS.

 

*Risk mitigation:*TELUS proactively analyzes and tests emergingand alternative wireless access technologies to assess the opportunities andthreats. In parallel, TELUS continues to invest in network upgrades that aretechnology-agnostic and can be levered across various access technologies, suchas towers, leasehold improvements and power systems. TELUS supports globalstandards and the technology strategy team has executed numerous trials togauge the benefits and costs. Emerging wireless technologies are enabled onlyby spectrum, whether licensed or unlicensed, provided by Industry Canada. TELUSactively engages with the governing bodies to elicit and influence theregulatory environment towards an amenable, healthy, and free market frameworkfor TELUS and the wireless industry at large.

 

### **10.3 Regulatory**

### ** **

*Regulatory developments could have a material impact on TELUS’operating procedures, costs and revenues*

 

TELUS’telecommunications and broadcasting services are regulated under federallegislation by the Canadian Radio-television and Telecommunications Commission(CRTC), Industry Canada and Canadian Heritage. The CRTC has taken steps toforbear from regulating prices for services offered in competitive markets,such as local residential and business services in selected exchanges, longdistance and some data services, and does not regulate the pricing of wirelessservices. Local telecommunications services that have not been forborne areregulated by the CRTC using a price cap 

 

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mechanism.Major areas of regulatory review currently include the regulatory framework forwholesale services (services provided on a mandated basis to competitors) andthe utilization of the funds in the ILECs’ deferral accounts.

 

The outcome ofthe regulatory reviews, proceedings and appeals discussed below and otherregulatory developments could have a material impact on TELUS’ operatingprocedures, costs and revenues.

 

*Implementation of phase II wireless enhanced911 (E9-1-1) services*

 

On February 2, 2009, the CRTC issued *TelecomPolicy CRTC 2009-40*, directing Canadian wireless service providersto implement wireless phase II E9-1-1 service by February 1, 2010, andruling that wireless service providers are responsible for their own costs ofimplementation. Wireless phase II E9-1-1 services will automatically provideE9-1-1 call centres with more precise location information when a person calls9-1-1 emergency services from their wireless handsets. Wireless phase II E9-1-1services will provide the caller’s location using a GPS-based system, atriangulation method using the nearest cellular towers, or a combinationthereof. The CRTC has ordered all Canadian wireless providers to implementwireless phase II E9-1-1 services in the same areas where wireline E9-1-1services were already available by February 1, 2010 (stage 1). The CRTC isexpected to issue a decision on stage 2 of phase II E9-1-1 (providing mid-calllocation updates) after a working group tables its recommendations later in2009. TELUS is working to meet the requirements of this CRTC decision, butthere can be no assurance that TELUS can successfully implement the first stageof wireless phase II E9-1-1 services across its entire wireless operatingterritory by February 1, 2010.

 

*2008 AWS spectrum auction*

 

In July 2008,Industry Canada completed the spectrum auction for mobile wireless services at1.7/2.1 GHz (AWS). This auction contained favourable conditions for newentrants such as a 40 MHz spectrum set-aside and mandated roaming andtower sharing. Industry Canada outlined detailed rules surrounding theimplementation of mandated roaming and tower sharing, chief among which is theimposition of arbitration to settle any disputes between new entrants andincumbents relating to roaming or tower/site sharing. TELUS expects to face newcompetition in the future as a result of this auction, which is expected toadversely affect the market share of existing wireless carriers.Notwithstanding, the number, geographic coverage, and timing of launch of newentrants remain uncertain due to build-out costs, capital market conditions andrestrictions on foreign investment.

 

*Future availability of wireless spectrum*

 

IndustryCanada plans to auction spectrum in both the 700 MHz and 2.5/2.6 GHzbands in the 2010 to 2011 timeframe. **Therelease of future wireless spectrum in these bands could facilitate expansionfor incumbents and provide additional opportunities for new entrants to offerwireless broadband services. There is uncertainty regarding the government’stiming and position in regulating these potential spectrum bands. TELUS expectsa 700 MHz spectrum auction discussion paper sometime in mid- to late 2009.However, it is possible that most new spectrum will not be available for mobilepurposes prior to 2011 or 2012.**

 

Currently,spectrum at 2.5 GHz has been used for fixed wireless and fixed wirelessbroadcast applications. However, this spectrum band has been given a primarymobile designation by Industry Canada and is anticipated to become a commonglobal band for mobile services. In 2006, Industry Canada issued a policy thatprovides for a claw back of a portion of the band for auction when mobileservice is implemented within the band, and has announced that it intends toauction unassigned portions of the multipoint distribution service portion ofthe band. At the end of November 2008, Industry Canada granted a licenceto Craig Wireless to move its fixed service in Vancouver to mobile, consistentwith this policy. At the same time Look Communications announced that it waslooking to sell similar spectrum in Ontario and Quebec.

 

TELUS expectsa 2.5 GHz spectrum auction discussion paper to be announced in mid- tolate 2009 and an auction to be scheduled sometime in 2010 or later.

 

CompetitorsBell and Rogers hold significant amounts of spectrum at 2.5 GHz throughtheir Inukshuk partnership, have deployed a fixed wireless solution in majorcities including Toronto, Montreal, Calgary, Edmonton and Vancouver, and aremarketing portable DSL service with moderate print and billboard campaigns.Although TELUS has experienced only limited competition from this and similarservices to date, there can be no assurance that future marketing of theseservices will not negatively impact TELUS’ wireless or wireline services.

 

*Local forbearance*

 

On December 14, 2006, the Governor in Council issued a directionto the CRTC to rely on market forces to the maximum extent feasible; to ensuretechnological and competitive neutrality and enable competition from newtechnologies; to use tariff approval mechanisms that are as minimally intrusiveas possible; to complete a review of the framework for mandated access towholesale services; to publish and maintain performance standards for itsvarious processes; and to continue to explore new ways of streamlining itsprocesses.

 

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On April 4,2007, the Governor in Council issued Order in Council P.C. 2007-532 and variedDecision 2006-15 by changing the criteria for local forbearance for residentialand business local exchange services. Instead of requiring at least 25% marketshare loss in large local forbearance regions (Decision 2006-15), the Order inCouncil requires two independent facilities-based competitors (of which one canbe a wireless service provider) capable of serving at least 75% of theresidential lines for forbearance based on local exchange areas. For businesslocal exchange service, forbearance is granted when one facilities-basedcompetitor is able to serve at least 75% of the business lines.

 

The Order in Council reduced the number of quality-of-serviceindicators that must be met for the six-month period prior to the forbearanceapplication. The Order in Council also removed restrictions on winbacks (i.e.delays on actions to regain customers who have changed to a competing serviceprovider) and promotions by the incumbent telephone companies.

 

Since the Order in Council was issued, TELUS has obtained forbearancefor about two-thirds of its incumbent local residential service lines and localbusiness service lines in B.C., Alberta and Eastern Quebec.

 

As a result of the forbearance granted for local residential andbusiness services, TELUS believes it has significantly enhanced flexibility in pricing,promotions and bundling to compete with other providers of these services.However, TELUS has no assurance that it will be able to prevent further marketshare loss in these markets or that it will be able to obtain forbearance inother exchanges where it is facing competition for residential and businesscustomers.

 

*Price cap regulation*

 

Price capregulation continues to apply to a basket of local services provided by ILECs.TELUS is subject to price cap regulation as an ILEC in B.C., Alberta, andEastern Quebec. On April 30, 2007, the CRTC issued Decision 2007-27 (thirdprice cap period) and established an open-ended price cap regime.

 

The CRTCremoved the productivity adjustment from the Residential Services in non-highcost serving areas (non-HCSA or urban) price cap basket and the Other CappedServices price cap basket. For the Competitor Services price cap basket, theCRTC reduced the productivity adjustment from inflation minus 3.5% to inflationminus 3.2%. The Commission moved residential optional local services andservice bundles containing residential local exchange service to the UncappedServices basket (no upward pricing constraints).

 

The CRTCcapped residential service rates in urban areas at existing levels and limitedannual rate increases in rural areas to the rate of inflation (to a maximum of5%). However, the CRTC removed restrictions on rate de-averaging forresidential local service and optional local services. Subsequent to the pricecap decision (Decision 2007-106), the CRTC also removed restrictions on ratede-averaging for business and pay telephone services.

 

The CRTCincorporated a deferral account into the second price cap period to which anamount equivalent to the cumulative annual productivity adjustments forresidential services in non-high cost serving areas was added. Since the CRTCremoved these productivity adjustments in Decision 2007-27, the CRTC alsodetermined that the deferral account was no longer required.

 

In February 2006,the CRTC determined in Decision 2006-9 that the funds accumulated in the ILECdeferral accounts would be used to expand broadband services to rural andremote communities and to improve accessibility to telecommunications servicesfor individuals with disabilities. After receiving proposals from the ILECs inresponse to Decision 2006-9, the CRTC launched a further proceeding in November 2006(Public Notice 2006-15) to further explore the ILECs’ proposals.

 

On July 6,2007, the CRTC issued Decision 2007-50, which partially approved TELUS’broadband expansion proposal for locations in B.C. and Eastern Quebec. TELUS isstill waiting for the CRTC’s final decision in this proceeding on the balanceof its broadband expansion proposal and its proposals to improve accessibilityto telecommunications services for individuals with disabilities.

 

On January 17, 2008, the CRTC issued Decision 2008-1 and approvedan additional 119 communities in B.C., Alberta and Eastern Quebec for broadbandexpansion (subsequently reduced to 102 communities following a competitor’sappeal). The CRTC also approved TELUS’ proposed initiatives to enhanceaccessibility to telecommunications services for the disabled. The CRTCdetermined in Decision 2008-1 that any funds remaining in the ILEC deferralaccounts after the initiatives to expand broadband services and to improve accessibilityto telecommunications services for individuals with disabilities are completedwill be refunded to customers.

 

TELUS is alsowaiting for three appeals to be heard by the Supreme Court of Canada on how thefunds in the ILECs’ deferral accounts should be treated. There is no guaranteethat the ILECs will be able to proceed with their proposals for the use ofdeferral account funds pending the outcome of the appeals to the Supreme Court,as described in *Section 7.8* under *Commitments and contingent liabilities*.

 

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*Review of certain Phase II costing issues*

 

In Decision 2008-14, issued on February 21,2008, the CRTC standardized many aspects of the Phase II costing methodologyused by the ILECs to determine costs for regulated telecommunications services.In the first quarter of 2009, the CRTC will complete a review of the remainingcomponents of Phase II costing not addressed in the proceeding leading toDecision 2008-14. TELUS has no assurance that the costing methodologies adopted by theCRTC will not dampen TELUS’ ability to effectively market its products andservices.

 

*Essential services*

 

In March 2008,the CRTC issued Decision 2008-17, which established a new regulatory framework for wholesale services.The CRTC revised the definition of an essential service and assignedwholesale services to six categories of services. Only one category of serviceswill be phased out after a period of three to five years and the pricing rules forwholesale services are generally the same as in the previous regime. TELUS hasno assurance that the new regulatory regime for the continued provision ofessential and non-essential services to competitors will not be more onerousthan the previous regime. The CRTC indicated that it will conduct anotherreview of the regulatory framework for wholesale services after six years.

 

*Quality-of-service monitoring*

 

In November 2008,the CRTC issued Decision 2008-105, which eliminated the rate adjustment planand associated rate rebates for ILECs that do not meet approvedquality-of-service standards. As well, the CRTC reduced the number ofquality-of-service standards indicators from 17 to three and established aprocess to determine the quality-of-service monitoring regime that will be usedin non-forborne areas. TELUS has no assurance that the regulatory regime forquality-of-service monitoring will not be more onerous than the current regime.

 

*TELUS’ broadcasting distribution undertakings*

 

TELUS holdslicences from the CRTC to operate terrestrial broadcasting distributionundertakings to serve various communities in B.C. and Alberta (both licensed inAugust 2003) and Eastern Quebec (licensed in July 2005). TELUS alsoholds a licence to operate a national VOD undertaking (licensed in September 2003).TELUS is in the process of renewing its licences which were issued in 2003.TELUS expects to be granted renewal of these licences for another fullseven-year term although there can be no assurance that this will be the case.

 

The CRTC hasissued a revised policy for broadcasting distribution undertakings inBroadcasting Public Notice 2008-100. In this policy, the CRTC has increasedcontribution requirements of distribution undertakings by 1% of gross revenues.This policy also altered the framework regarding the offering of distantover-the-air television signals, which will likely make the offering oftime-shifting packages more expensive. The new policy framework also providesfor new flexibility for broadcasting distribution undertakings (BDUs) inpackaging of Canadian and foreign programming services. These changes will takeeffect at the same time as the digital conversion of analog over-the-airsignals in August 2011.

 

*CRTC review of new media and Internet traffic management practices*

 

The CRTC hasinitiated a proceeding to review its exemption orders regarding new mediabroadcasting undertakings (which dates back to 1999) and mobile televisionbroadcasting undertakings (which was issued in 2005). The CRTC has a policy ofreviewing its exemption orders every five years and so it may be consideredthat a review of the new media exemption order is long overdue. The CRTC haslaunched a public hearing (Broadcasting Notice of Public Hearing 2008-11) forthis review and initial comments have been filed. Some of the proposals made inthis first round of comments, which will be considered by the CRTC at the oralhearing beginning in February 2009, include mandating a contributionrequirement for ISPs to create a fund to subsidize the creation of Canadian newmedia content and implementing incentives for the promotion of Canadian newmedia content on the Internet. These proposals all raise significantjurisdictional, public policy and enforcement issues for the CRTC but there canbe no assurance that the CRTC will not attempt to implement some measures tobenefit Canadian new media content. A decision is expected by the end of 2009.

 

The CRTC hasalso initiated a separate proceeding to investigate the traffic managementpractices of Canadian ISPs. This follows a decision by the CRTC denying arequest to have Bell halt its traffic shaping (or throttling) on its wholesaleADSL access service. The CRTC’s review of traffic management practices willinclude both wholesale and retail services and will discuss such issues as thegrowth of Internet traffic and how this has affected ISP networks and what (ifany) practices might violate the unjust discrimination or control of content rules inthe *Telecommunications Act*. An oral hearingis scheduled for July 2009 and a decision (which may set out some broadprinciples or guidelines under which the Commission will review futurecontested network management practices) is not expected until early 2010.

 

*Radiocommunication licences regulated by Industry Canada*

 

All wirelesscommunications depend on the use of radio transmissions and, therefore, requireaccess to radio spectrum. Under the *Radiocommunication Act*,Industry Canada regulates, manages and controls the allocation of spectrum in 

 

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Canada andlicenses frequency bands and/or radio channels within various frequency bandsto service providers and private users. Voice and data wireless communicationsvia cellular, specialized mobile radio (SMR), enhanced specialized mobile radioand PCS systems, among others, require such licences. TELUS’ PCS and cellularlicences include various terms and conditions, such as: meeting Canadianownership requirements, meeting obligations regarding coverage and build-out,spending at least 2% of certain PCS and cellular revenues on research anddevelopment, annual reporting and resale to competitors. While TELUS believesthat it is substantially in compliance with its licence conditions, there canbe no assurance that it will be found to comply with all licence conditions, orif found not to be compliant that a waiver will be granted, or that the coststo be incurred to achieve compliance will not be significant. Initial licencefees and annual renewal fees are payable for licences that have not beenobtained via spectrum auction. There can be no assurance that Industry Canadawill not seek to increase these fees in the future.

 

*700 MHz spectrum:* The U.S. had a spectrum auction for the700 MHz spectrum in January 2008. There is speculation that IndustryCanada may also initiate an auction consultation process for spectrum at700 MHz. There is no guarantee that the Canadian government will notreserve spectrum for new entrants or that it will not adopt some open accessprovisions for some of this spectrum as was done in the U.S.

 

*800 MHz re-banding:* In 2004, the U.S. Federal CommunicationsCommission (FCC) released a Report and Order adopting a plan to resolveinterference to public safety radio systems in the 800 MHz band.Sprint-Nextel’s iDEN system was identified as the primary contributor of thisinterference. The U.S. is planning to realign the band so that public safetysystems would be relocated to the bottom of the 800 MHz band andSprint-Nextel’s iDEN system would operate in the upper part of the band.

 

In Canada, the TELUS Mike (iDEN) network also uses this same frequencyspectrum. Because each site for the Mike network is analyzed and licensedindividually, TELUS and Industry Canada have been able to minimize the numberof public safety interference issues to a few across the country versus morethan 1,500 in the U.S.

 

However, TELUS has an existing special co-ordination procedure (SCP),endorsed by both Industry Canada and the FCC, wherein TELUS and Sprint-Nextelutilize each other’s channels within their respective iDEN networks at specificborder areas across the country. These channels serve to increase the number ofavailable channels available to both networks to better serve the area. There-alignment threatens the continued use of the channels specified in the SCP.

 

While discussions with both the Canadian and U.S. regulators indicatethat TELUS should be able to continue to have access to a certain number of SCPchannels in the border areas, until such time as the U.S. announces its finaldecision, there is no assurance that TELUS will be able to continue to usethese channels.

 

*Foreign ownership restrictions*

 

TELUS and itssubsidiaries are subject to the foreign ownership restrictions imposed by the *Telecommunications Act*, the *RadiocommunicationAct* and the *Broadcasting Act*.Although TELUS believes that TELUS Corporation and its subsidiaries are incompliance with the relevant legislation, there can be no assurance that afuture CRTC, Industry Canada or Heritage Canada determination, or events beyondTELUS’ control, will not result in TELUS ceasing to comply with the relevantlegislation. If such a development were to occur, the ability of TELUS’subsidiaries to operate as Canadian carriers under the *TelecommunicationsAct* or to maintain, renew or secure licences under the *Radiocommunication Act* and *BroadcastingAct*could be jeopardized and TELUS’ business could be materiallyadversely affected.

 

In June 2008,the Competition Policy Review Panel provided its final report to the Ministerof Industry. The Panel made a number of recommendations to liberalize foreignownership rules pertaining to the telecommunications and broadcastingsectors. TELUSanticipates that the chances for removal of foreign ownership restrictionsunder a minority government are low. If foreign ownership restrictions werereduced or eliminated, the risk of entry of a new telecommunications carrier that is foreign-owned or financed would be heightened.

 

*Risk mitigation for regulatory matters:*TELUSadvocates a regulatory environment that relies, to the greatest extentpossible, on market competition rather than regulatory intervention. TELUSbelieves this is in the best interest of customers.  TELUS has also supported the relaxation offoreign ownership restrictions in the past, but believes that any suchrelaxation must be on an equal basis for all broadcasting andtelecommunications companies.

 

### **10.4 Human resources**

### ** **

*Reliance on key personnel*

 

The success of TELUS is largely dependent on the abilities and experienceof its key employees. Competition for highly skilled and entrepreneurialmanagement and other key employees is intense in the communications industry.The loss of certain key employees, or deterioration in employee moraleresulting from organizational changes, unresolved collective agreements orongoing cost reduction, could have an adverse impact upon TELUS’ growth,business and profitability. The largest contributor to this risk is theexpected near-term increase in retirements by team members from Canada’spost-Second World War baby boom generation.

 

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*Risk mitigation:* The compensation program at TELUS is designedto support its high-performance culture and is both market-driven andperformance-based. This includes medium-term and long-term performanceincentives including employee performance bonuses at an individual, businessunit and organizational level; share option awards, restricted stock units(RSUs) and the TELUS Employee Share Purchase Plan; and a benefits program thatallows the tailoring of personal benefits choices to suit individual needs.Medium and long-term performance incentives for certain key personnel includeprimarily three-year vesting periods for share options and RSUs. By striving toensure TELUS’ compensation remains competitive, the Company seeks to maintainthe ability to attract and retain key personnel. Recent global economic turmoiland reduced value of shares and equity portfolios may reduce the effectivenessof some retention incentives, as well as reduce employee turnover.

 

For 2009, the need to maintain operating margins and fund strategicgrowth initiatives along with current pressures in the global economy and thecapital markets led to a decision to freeze the annual management compensationreview program this year. As a result, base salaries and individual targetpercentages for performance bonuses will remain unchanged in 2009, except inextraordinary cases. To help contain expenses further, the Company is having employeesincrease their share of the increased costs associated with the 2009 benefitsprogram, such as helping fund increased long-term disability premiums, andabsorbing a portion of increased inflation costs for extended health and dentalplans. Through direct and upfront communication to all employees, the Companyhopes to manage engagement and morale issues with respect to the compensationprogram. The Company will continue to focus on other factors which have a clearalignment with engagement including performance management, careeropportunities, training and development and recognition. TELUS also continuesto implement targeted retention solutions for employees with talents that arescarce in the marketplace.

 

*Collective bargaining at TELUS Québec*

 

Collective bargaining in the TELUS Québec region is expected tocontinue in 2009 for two small collective agreements. The first is with the Syndicat des agents de maîtrise deTELUS (SAMT) covering20 professional and supervisory team members in Quebec that expired on March 31,2007. The second is with the Syndicat québécois des employés de TELUS (SQET) covering approximately 1,000 trades,clerical and operator services team members that will expire on December 31,2009. In any set of labour negotiations, there can be no assurance that thenegotiated compensation expenses or changes to operating efficiency will be asplanned or that reduced productivity and work disruptions will not occur duringthe course of collective bargaining prior to settlement. However, the SQETcollective agreement does not expire until the end of 2009 and under the termsof the Canada Labour Code, no legal work stoppage can occur until aftercertain statutory conditions are met, including expiration of the collectiveagreement. Risks associated with a legal work stoppage in 2009 areconsidered low.

 

*Risk mitigation:*A governance model is in place to ensure thefinancial and operating impact of any proposed terms of settlement are assessedand determined to be aligned with TELUS’ strategic direction. As is prudent inany round of collective bargaining, while negotiations proceed, any potentialneed to continue operations in response to work disruptions will be addressedthrough contingency planning.

 

### **10.5 Process risks**

### ** **

TELUSsystems, processes and internal reorganizations could negatively impactfinancial results and customer service.

 

*Systems and processes*

 

TELUS has numerous complex systems andprocess change initiatives underway, including a multi-year, multi-phasedevelopment of a new billing system for the wireline segment. However, riskswere reduced in 2008 with the successful implementation of the next phase ofthe converged billing and client care system for residential customers in B.C.For the first time, a majority of more than two million residential customersin B.C. and Alberta are supported by one integrated system. Future developmentand integration activities include migration of remaining B.C. and Albertaresidential customers to the integrated system, strengthening the foundationand providing additional capabilities to enhance the customer and call centreagent experience. In addition, the organization will leveragecomponents of the system to address needs in other areas of business within theCompany.

 

There can be noassurance that the full complement of the Company’s various systems and processchange initiatives will be successfully implemented, or that sufficientlyskilled resources will be available to complete all key initiatives planned for2009 and beyond. For example, the successful commercial launch of the Company’sHSPA service by early 2010 (see *Section 10.2 Technology*)is dependent in part on the successful implementation of new billing and ITsystems. There is usually risk that some projects may be deferred or cancelled,which could negatively impact TELUS’ processes and ability to effectivelylaunch new products and services; achieve and maintain a competitive coststructure; provide competitive customer service; and deliver better informationand analytics to management.

 

*Riskmitigation:* In general, TELUS strives to ensure that system development prioritiesare selected in an optimal manner. TELUS’ project management approach includesextensive risk identification and contingency planning, scope and changecontrol, and resource and quality management. The quality assurance of thesolutions includes extensive functional, performance and revenue assurancetesting, as well as capturing and utilizing lessons learned. In addition, TELUSoften 

 

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moves itsbusiness continuity planning and emergency management operations centre to aheightened state of readiness in advance of major systems conversions.

 

*Large complex deals*

 

TELUS’operating efficiency and earnings may be negatively impacted by challenges with(or ineffective) implementation of large, complex deals for enterprisecustomers, which may be characterized by significant upfront expenses andcapital expenditures, and a need to anticipate, understand and respond tocomplex and multi-faceted enterprise customer specific requirements andstakeholders. There can be no assurance that service implementation willproceed as planned and expected efficiencies will be achieved, which may impactreturn on investment or desired margins to be realized. The Company may also beconstrained by available staff, system resources and co-operation of existingservice providers, which may limit the number of large contracts that can beimplemented concurrently in a given period and/or increase the cost to TELUSrelated to such implementations.

 

*Riskmitigation for large complex deals:*TELUS has recently implemented internalreorganizations, such as one that consolidated three enablingunits, Technology strategy, Network operations and Businesstransformation, into two integrated teams: *Technology strategy*and *Business transformation and Technology operations*.The expected future benefits include streamlined operations, more effectivedeployment of technologies and supporting systems, cost efficiencies, improvedcustomer service, and better capability to implement large complex deals. TELUSfollows industry standard practices for rigorous project management includingexecutive (senior) level governance and project oversight; appropriate projectresources, tools and supporting processes; and proactive project specific riskassessments and risk mitigation planning. TELUS also conducts independentproject reviews and internal audits to help monitor progress and identify areaswhich may require additional focus, and to identify systemic issues andlearnings in project implementations which may be shared between projects.

 

*Reorganizations*

 

Arising fromits operating efficiency program, the Company carries out a number ofoperational consolidation, rationalization and integration initiatives eachyear. The initiatives are aimed to improve the Company’s operating productivityand competitiveness. TELUS’ estimate of restructuring costs in 2009 isapproximately $50 million to $75 million, compared to $59 million in2008. There can be no assurance that all planned efficiency initiatives will becompleted, or that such initiatives will provide the expected benefits or nothave a negative impact on operating and financial results and customer service.

 

*Riskmitigation:* TELUS focuses on and manages organizational changes through aformalized business transformation function by leveraging the expertise, keylearnings and best practices gained from mergers, business integrations andefficiency-related reorganizations in recent years.

 

*Foreign operations*

 

The increaseof resources in TELUS’ international operations (particularly in TELUSInternational Philippines Inc. call centres in Manila, as well as the Company’snewly expanded activities in the United States and other foreign jurisdictionsincluding Panama, Guatemala, El Salvador, and Barbados) presents unique risks,including country-specific risks (such as different political, legal andregulatory regimes and cultural values), lack of diversity in geographicallocations, concentration of customers, different taxation regimes,infrastructure and security challenges, different exposure to and frequency ofnatural disasters, and the requirement for system processes that work acrossmultiple time zones, cultures and countries. The Philippines operating costsare in pesos, while the revenues are generally in U.S. dollars, exposing TELUSto certain foreign currency risks. There is no assurance that internationalinitiatives and risk mitigation efforts will provide the benefits andefficiencies expected, or that there will not be significant difficulties incombining the different management and cultures, which could result in anegative impact on operating and financial results.

 

*Riskmitigation:* TELUS’ strategy is to improve the diversity and geographic distributionof its operations, its customers and conduct of business processing outsourcingactivities. The continued expansion of international operations, as notedabove, provides TELUS with more geographic diversity, spreads politicalrisk among the foreign jurisdictions, and provides the Company an ability toserve customers in multiple languages and in multiple time zones. In the springof 2009, TELUS expects to open a call centre in Clark County, Nevada to addon-shore Spanish-language support to its broad suite of call centre andbusiness process outsourcing services for large corporate customers.The new call centre will complement TELUS’ recent purchase of a minority sharein an established call centre operation in three Central Americancountries. TELUS has alsoimplemented a currency hedging program to reduce certain foreign currencyexposures. In addition, the Company continues to work with its internationaloperations to extend operational best practices, to integrate and aligninternational and domestic Canadian operations, as appropriate, and to striveto ensure that internal controls are implemented, tested, monitored andmaintained.

 

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*Integration of acquisitions*

 

Post-merger and post-acquisition activities, such as followed theacquisition of Emergis and Fastvibe in January 2008, include the reviewand alignment of accounting policies, employee transfers and moves, informationsystems integration, optimization of service offerings and establishment ofcontrol over new operations. Such activities may not be conducted efficientlyand effectively, negatively impacting service levels, competitive position andexpected financial results.

 

*Risk mitigation:* TELUS has a team that performs apost-merger integration (PMI) function. The PMI team applies an integrationmodel, based on learnings from numerous previous post-acquisition integrations,which enhances and accelerates the standardization of TELUS’ business processesand strives to preserve the unique qualities of acquired operations. PMI beginswith strategic, pre-closing analysis and planning, and continues after closingwith execution of a plan. Initial plans are re-evaluated and assessedregularly, based on timely feedback received from the integration teams.

 

### **10.6 Financingand debt requirements**

 

*TELUS’ business plans and growthcould be negatively affected if existing financing is not sufficient to coverfunding requirements*

 

Risk factors such as disruptions in the capitalmarkets, increased bank capitalization regulations, reduced lending in general,or a reduced number of active Canadian chartered banks as a result of reducedactivity or consolidation, could reduce capital available, or increase the costof such capital, for investment grade corporate credits such as TELUS.

 

*Risk mitigation:* TELUS may finance future capitalrequirements with internally generated funds as well as, from time to time,borrowings under the unutilized portion of its bank credit facility, use ofsecuritized accounts receivable, use of commercial paper or the issuance ofdebt or equity securities. TELUS has access to a shelf prospectus pursuant towhich it can offer $2.5 billion of debt and equity. TELUS believes itsadherence to its stated financial policies and resulting investment gradecredit ratings, coupled with its efforts to maintain a constructiverelationship with banks, investors and credit rating agencies, continue toprovide reasonable access to capital markets.

 

On March 3, 2008, the Company closed a new$700 million, 364-day credit facility with a select group of Canadian banks.This facility provides incremental liquidity to TELUS and allows the Company tocontinue to meet one of its financial objectives, which is to generallymaintain $1 billion in available liquidity. The Company had unutilized creditfacilities of $1.15 billion at December 31, 2008, including the364-day facility. On December 15, 2008, TELUS reached agreement with theparticipating banks to extend this agreement to March 1, 2010. Thisextension of the credit agreement in the current difficult credit marketsdemonstrates TELUS’ capability to finance itself in a challenging environment.

 

As described in *Section 7.6Accounts receivable securitization,* TELUS Communications Inc. (TCI)entered into an agreement with an arm’s-length securitization trust under whichit is able to sell an interest in certain of its trade receivables up to amaximum of $650 million. At December 31, 2008, TCI had receivedaggregate cash proceeds of $300 million. TCI is required to maintain atleast a BBB (low) credit rating by DBRS Ltd — currently A (low) — failingwhich, the Company may be required to wind down the program prior to the July 2009termination date of the agreement. The Company has routinely extended thetermination date of the agreement in the past and plans to seek an extension orestablish a replacement agreement prior to the current termination date butthere can be no assurance it will be successful.

 

*Ability to refinance maturingdebt*

 

On August 6, 2008, TELUS’commercial paper program was increased from a maximum of $800 million to amaximum of $1.2 billion to permit increased access to low-cost funding. At December 31,2008, TELUS had $432 million of commercial paper issued, which will needto be refinanced on an ongoing basis to enable the cost savings relative toborrowing on the 2012 credit facility to be realized. Capital market conditionsmay prohibit the rolling of commercial paper at low rates.

 

*Risk mitigation*: The Company’s commercial paperprogram is fully backstopped by the 2012 credit facility. TELUS may refinanceamounts drawn on its credit facilities with longer-term maturities. At December 31,2008, TELUS had no significant amounts of long-term debt maturing until 2011and 2012. Consistent with past practice, TELUS may also pre-fund or refinancelong-term debt prior to maturity. TELUS could also reduce repurchase activityunder its normal course issuer bid (NCIB) share repurchase plan to conservefunds for operations or servicing debt. The NCIB program annual approvedmaximum amount to December 2009 is eight million shares or approximately2.5% of TELUS’ outstanding shares (2008 program was for a maximum 20 millionshares with 6.8 million purchased).

 

*A reductionin TELUS credit ratings could impact TELUS’ cost of capital and access tocapital*

 

TELUS’ cost of capital could increase and accessto capital might be affected by a reduction in TELUS’ and/or TCI’s creditratings. There can be no assurance that TELUS can maintain or improve currentcredit ratings.

 

*Risk mitigation:*TELUS seeks to achieve, over time,debt credit ratings in the range of BBB+ to A-, or equivalent. The four creditrating agencies that rate TELUS currently have ratings that are in line withthis target with a stable outlook. TELUS

 

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has financial policies in placethat were established to help maintain or improve existing credit ratings. (See*Section 7.4 Liquidity and capital resourcemeasures.*) TELUS’ credit ratings were confirmed in 2008 by the fourcredit rating agencies that cover the Company.

 

*Lower thanexpected free cash flow could constrain ability to invest in operations or makepurchases under NCIB share repurchase programs*

 

TELUS expects to generate free cash flow in 2009,which would be available to, among other things, pay dividends to shareholdersand possibly repurchase shares. While anticipated cash flow is expected to bemore than sufficient to meet current requirements and remain in compliance withTELUS’ financial policies, these intentions could constrain TELUS’ ability toinvest in its operations for future growth or to complete share repurchases.TELUS has set its financial policies with the expectation that taxable incomewill be generated and that substantial net cash tax payments of approximately$320 to $350 million will commence in 2009, in respect of payments for the 2008tax year in February 2009 and on an instalment basis for 2009. Inaddition, the Company expects funding of employee defined benefit pension plansto increase in 2009, as described in *Section 1.5*.Payment of net cash income taxes and funding of defined benefits plans in thefuture will reduce the after-tax cash flow otherwise available to returncapital to shareholders. If actual results are different from TELUS’expectations, there can be no assurance that TELUS will not need to change itsfinancing plans, including its intention to repurchase TELUS shares, or pay dividendsaccording to the target payout guideline.

 

*Risk mitigation:* From December 2004 through December 2008,TELUS had sufficient cash flow to repurchase shares under five NCIB programs.See *Section 7.3 Cash used by financing activities.*As the Company begins paying cash income taxes, it may choose to not renew orto reduce the size of the NCIB share repurchase program, as warranted.

 

The TELUS Board reviews the dividend each quarter,based on a number of factors including a target dividend payout ratio guidelineof 45 to 55% of sustainable net earnings. This review resulted in a 2.5 cent or5.6% increase in the quarterly dividend payout rate effective with the dividendpaid on January 2, 2009. Based on the beginning-of-year level of quarterlydividend and shares outstanding, dividend payments would total approximately$600 million in 2009.

 

### **10.7 Tax matters**

### ** **

*Income and commodity tax amounts, including tax expense, may bematerially different than expected*

 

The operations of TELUS are complex and related tax interpretations,regulations and legislation that pertain to TELUS’ activities are subject tocontinual change. The Company collects and pays significant amounts ofcommodity taxes, such as provincial sales taxes and federal goods and servicestaxes, to various taxation authorities. The Company also has significantamounts of income taxes receivable and payable, future income tax liabilitiesand income tax expense. Income tax amounts are based on TELUS management’sestimates, using accounting principles that recognize the benefit of income taxpositions that are more likely than not of being sustained upon examination onan issue-by-issue basis. The benefit is measured at the largest amount withgreater than 50% probability of being realized. The assessment of thelikelihood and amount of income tax benefits, as well as the timing ofrealizing such amounts, can materially affect the determination of net incomeor cash flows in future periods. As noted in *Section 1.5Financial and operating targets for 2009*, TELUS currently expectscash income tax payments to increase substantially in 2009, with cash incometaxes, net of recoveries, of approximately $320 to $350 million, as the Companypays 2008 taxes in February 2009 and begins paying instalments for the 2009tax year. The 2009 blended statutory income tax rate is expected to be 30 to31%. These expectations can change as a result of changes in interpretations,regulations, legislation or jurisprudence.

 

The timing concerning the monetization or realization of future incometax accounts is uncertain, as it is dependent on future earnings of TELUS andother events. The amounts of future income tax liabilities are also uncertain,as the amounts are based upon substantively enacted future income tax rates ineffect at the time, which can be changed by governments. The amount of futureincome tax liabilities is also based upon the Company’s anticipated mix ofrevenues among the jurisdictions in which it operates, which is also subject tochange.

 

The review activities of the Canada Revenue Agency and otherjurisdictions’ tax authorities affect the ultimate determination of the actualamounts of commodity taxes payable or receivable, income taxes payable orreceivable, future income tax liabilities and income tax expense. Therefore,there can be no assurance that taxes will be payable as anticipated and/or theamount and timing of receipt or use of the tax-related assets will be ascurrently expected. Management’s experience indicates the taxation authoritiesare more aggressively pursuing perceived tax issues and have increased theresources they put to these efforts.

 

In order to provide comprehensive solutions to primarily Canadian-basedcustomers operating in foreign jurisdictions, the Company has entered into furtherarrangements for the supply of services in such foreign jurisdictions, thusexposing itself to multiple forms of taxation.

 

In 2008, the Company continued to further expand its activities intothe United States and other foreign jurisdictions including the Philippines,Panama, Guatemala, El Salvador and Barbados. In the U.S., federal, state andlocal jurisdictions

 

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have created varying complex regimes for income, revenue, sales anduse, and property taxes. The number and variation of such regimes in the U.S.jurisdictions where the Company has transactions causes additional financialrisk to the Company.

 

Not only does each foreign jurisdiction have complexities with languageand currency differences, each has its own taxation peculiarities in the formsof taxation imposed, such as value-added tax, gross receipts tax or income tax,as well as its legislation and tax treaties with Canada. Furthermore, thetelecommunications industry has unique issues that lead to uncertainty in theapplication or division of tax between domestic and foreign jurisdictions.Accordingly, TELUS’ foreign expansions during 2008 have increased the Company’sexposure to tax risks, from both financial and reputation perspectives.

 

*Risk mitigation:*The Company maintains an internal Taxationdepartment composed of professionals who are trained and educated in taxationadministration and who maintain an up-to-date knowledge base of newdevelopments in the underlying Canadian law, its interpretations andjurisprudence. This team is also responsible for the specialized accountingrequired for income taxes and accordingly this group is charged withmaintaining state-of-the-art knowledge of tax accounting developments and theimplementation of such relevant measures as are required from time to time.

 

The transactions of the Company are under continual review by theCompany’s Taxation department whereby transactions of an unusual ornon-recurring nature, in particular, are assessed from multiple risk-basedperspectives. Tax-related transaction risks are regularly communicated to andreassessed by tax counsel as a check to initial exposure assessment. As amatter of regular practice, large and international transactions are reviewedby external tax counsel, while other third-party advisors may also be engagedto express their view as to the potential for tax exigibility. The Company hasalso established an enterprise-wide program to develop world-class processesand information technology to deal with the income and indirect taxconsequences of its expanding foreign sales and investments. (See***Legal and regulatory compliance* in *Section 10.9Litigation and legal matters.)* Furthermore, the Company is addinginternal resources with international income and indirect tax experience toprovide advice on its international sales contracts and investments.

 

The Company engaged external counsel and advisors as appropriate toprovide advice and to comply with tax laws in the jurisdictions outside ofCanada in which it has operations of any significance. The advice and returnsprovided by such advisors and counsel are reviewed for reasonableness by TELUS’Taxation team.

 

### **10.8 Health,safety and environment**

### ** **

*Team member health, wellness andsafety*

 

Lost work time, resulting from the illness or injury of TELUS teammembers, can negatively impact organizational productivity and employee benefithealthcare costs.

 

*Risk mitigation:* Tominimize absences in the workplace, TELUS supports a holistic and proactiveapproach to team member health by providing comprehensive wellness, disability,ergonomic and employee assistance programs. To promote safe work practices, theCompany has long-standing training and orientation programs for team members,contractors and suppliers who access TELUS facilities. However, there can be noassurance that these health and safety programs and practices will be effectivein all situations.

 

*Radio frequency emission concerns*

 

Somestudies and various media reports have asserted that radio frequency emissionsfrom wireless handsets may be linked to certain adverse health effects. Therecan be no assurance that future health studies, government regulations orpublic concerns about the health effects of radio frequency emissions will nothave an adverse effect on the business and prospects for TELUS. For example,public concerns could reduce subscriber growth and usage, and increase costs asa result of modifying handsets, relocating wireless towers, and addressingincremental legal requirements and product liability lawsuits. TELUS continuesto monitor developments in this area.

 

*Risk mitigation:*Evidencein the scientific community, as determined and published in numerous studiesworldwide, supports the conclusion that there is no demonstrated public healthrisk associated with the use of wireless phones. These include a studypublished in the Journal of the National Cancer Institute in 2006, involving420,000 cell phone users in Denmark. This study found that cell phone users areno more likely than anyone else to suffer a range of cancer types. Governmentagencies in Canada responsible for establishing safe limits for signal levelsof radio devices also support the conclusion that wireless telephones are not ahealth risk. TELUS believes that the handsets it sells comply with allapplicable Canadian and U.S. government safety standards.

 

*Responsible driving*

 

Research has shown an increasein distraction levels for drivers using wireless phones while driving. ThreeCanadian provinces, Quebec, Nova Scotia, and Newfoundland and Labrador, havelegislated bans on the use of handheld mobile phones while driving, but theseprovinces do allow the use of hands-free wireless kits. Comparable legislationis pending in

 

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Ontario and similar bans existin parts of the United States and in other parts of the world. There can be noassurance that additional laws against using mobile phones or hands-freedevices while driving will not be passed and that, if passed, such laws willnot have a negative effect on subscriber growth rates, usage levels or wirelessrevenues.

 

*Risk mitigation:*TELUS promotes responsible drivingand recommends that driving safely should be every wireless customer’s firstresponsibility. TELUS believes that existing laws adequately address thematter.

 

*Concerns related to contaminated property andthe associated risk to human health or wildlife*

 

To conduct business operations, TELUS owns or leases a large number ofproperties. The presence of fuel systems for back-up power generation enablesthe provision of reliable service, but also poses the most significantenvironmental risk for the Company. Spills or releases of fuel from thesesystems have occurred occasionally, with the maximum cost incurred at any sitebeing approximately $1 million. In the telecommunications industry, smallvolumes of hazardous chemicals are commonly used at many sites. As well,certain hazardous materials are found at some locations. Based on the volumeand the nature of some of the specific chemicals handled, there is a risk posedto the Company, its directors and its officers by the liability from potentialspills and releases of hazardous chemicals into the environment. A significantportion of this risk is associated with the clean-up of sites contaminated byhistoric TELUS practices or by previous owners. There were no significantchanges to TELUS’ environmental risks during 2008. Although TELUS takesproactive measures to identify and mitigate environmental exposures and employsan environmental management system (EMS) based on ISO14001:2004, there can beno assurance that specific environmental incidents will not impact TELUSoperations in the future.

 

*Risk mitigation:*While TELUS’ environmental risks areconsidered immaterial to the Company’s financial results, they are importantfrom a corporate social responsibility perspective, which TELUS takesseriously. Poorly executed environmental performance or risk mitigation couldhave negative legal, brand or community relations impacts. The Company’s EMS isdesigned to identify and prioritize these risks. The specific risk posed byfuel systems is being addressed through a program to install containment andmonitoring equipment at sites with systems of qualifying size. Further detailedassessment of environmental risks and mitigation activities can be found in theTELUS corporate social responsibility report at telus.com/csr.

 

*Concernsrelated to climate change*

 

TELUS recognizes and supportsthe general view of the worldwide scientific community that anthropogenicsources of carbon dioxide (CO2) and other greenhouse gases (GHGs)are accelerating the rate of global climate change. If left unchecked, thecontinued increase in global GHG production may have far-reaching implicationsin terms of sea level rise, drought, flooding, propagation of disease,pestilence, increased frequency of severe weather events and many otherpotential effects. These changing circumstances could lead to increased threatsto network infrastructure that may negatively impact the ability to providetelecommunications services. It may also lead to increased insurance premiumsthat directly increase the cost of delivering service.

 

TELUS’ current estimate for itsannual North American CO2 emissions is 330,000 tonnes with thefinal audited figure to be published in the Company’s 2008 corporate socialresponsibility report. The majority of emissions are indirect, related to theconsumption of electricity in the Company’s networks and real estate. Directemissions include those from TELUS’ vehicle fleet and generators, while otheremissions include those associated with employee air travel.

 

*Risk mitigation*: While the Company’s CO2 and GHG emissions are not consideredsignificant on an industrial scale, TELUS recognizes its responsibility toidentify and act upon efficiency opportunities in its business that willminimize its contribution to climate change. Measures being implemented toaddress this include: mandating that all new real estate construction meets, ata minimum, leadership in energy efficiency and design (LEED) silverrequirements; optimization of real estate space; promotion of alternative workstyles such as teleworking; adopting server virtualization technology wheremultiple virtual operating systems can run on one physical server; reducedemployee travel; increased use of conventional and enhanced tele/videoconferencing; and the replacement of older fleet vehicles with new, morefuel-efficient models. Further detailed assessment of climate change risks andTELUS’ strategy can be found in the TELUS corporate social responsibilityreport on telus.com/csr.

 

### **10.9 Litigationand legal matters**

### ** **

*Investigations, claims and lawsuits*

 

Given the size of TELUS, investigations, claims and lawsuits seekingdamages and other relief are regularly threatened or pending against theCompany and its subsidiaries. TELUS cannot predict with any certainty theoutcome of such actions and as such, there can be no assurance that resultswill not be negatively impacted.

 

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*TELUS Corporation Pension Plan and TELUSEdmonton Pension Plan*

 

Two lawsuits were commenced in Alberta in 2001 and 2002, respectively,by plaintiffs alleging to be either members or business agents of theTelecommunications Workers Union (TWU), and suing allegedly on behalf of allcurrent or future beneficiaries of the TELUS Corporation Pension Plan and theTELUS Edmonton Pension Plan, respectively. The TELUS Corporation Pension Planrelated action named the Company, certain of its affiliates and certain presentand former trustees of the TELUS Corporation Pension Plan as defendants, andclaims damages in the sum of $445 million. The TELUS Edmonton Pension Planrelated action named the Company, certain of its affiliates and certainindividuals who are alleged to be trustees of the TELUS Edmonton Pension Planas defendants, and claims damages in the sum of $15.5 million. Thestatements of claim were subsequently amended in 2002 by the plaintiffs to includeallegations, *inter alia*, that benefitsprovided under the two pension plans are less advantageous than those providedunder their respective former pension plans, contrary to applicablelegislation, that insufficient contributions were made to the plans andcontribution holidays were taken and that the defendants wrongfully used thediverted funds, and that administration fees and expenses were improperlydeducted.

 

The Company believes that it has good defences to the actions. Shouldthe ultimate resolution of these lawsuits differ from management’s assessmentand assumptions, a material adjustment to the Company’s financial position andthe results of its operations could result.

 

*Risk mitigation:*As a term of the 2005 settlement reachedbetween TELUS Communications Inc. and the TWU that resulted in a collectiveagreement, the TWU has agreed to not provide any direct or indirect financialor other assistance to the plaintiffs in these actions, and to communicate tothe plaintiffs the TWU’s desire and recommendation that these proceedings bedismissed or discontinued. However, the Company has been advised by the TWUthat the plaintiffs have not agreed to dismiss or discontinue these actions,and the Company has not been informed of any change in this regard.

 

*Certified class action*

 

A class action was brought in 2004 under class action legislation inSaskatchewan against a number of past and present wireless service providersincluding the Company. The claim alleges that each of the carrier defendants isin breach of contract and has violated competition, trade practices andconsumer protection legislation across Canada in connection with the collectionof system access fees, and seeks to recover direct and punitive damages in anunspecified amount. Similar proceedings were commenced in other provinces. Anational class was certified on September 17, 2007 by the SaskatchewanCourt of Queen’s Bench. On February 20, 2008, the same court removed fromthe class all customers of the Company who are bound by an arbitration clause,applying two recent decisions of the Supreme Court of Canada. The Company has applied for leave toappeal the 2007 certification decision. Certification is a procedural step. Ifthe Company is unsuccessful on appeal of the certification decision, theplaintiff would still be required to prove the merits of the claim.

 

*Risk mitigation:* The Company believes that it has good defencesto the action. Should the ultimate resolution of the action differ frommanagement’s assessments and assumptions, a material adjustment to the Company’sfinancial position and the results of its operations could result.

 

*Uncertified class actions*

 

TELUS and certain subsidiaries are defendants in a number ofuncertified class actions. The Company has observed an increased willingness onthe part of claimants to launch class actions whereby a representativeplaintiff seeks to pursue a legal claim on behalf of a large group of persons.A successful class action lawsuit, by its nature, could result in a sizable damageaward that negatively affects a defendant’s results.

 

One such lawsuit is a class action was brought on June 26, 2008,in the Saskatchewan Court of Queen’s Bench alleging that, among other things,Canadian telecommunications carriers including the Company have failed toprovide proper notice of 9-1-1 charges to the public and have been deceitfullypassing it off as government charges. The Plaintiffs seek restitution anddirect and punitive damages in an unspecified amount. The Company is assessingthe merits of this claim, but the potential for liability and magnitude ofpotential loss cannot be readily determined at this time.

 

*Risk mitigation:* The Company is vigorously defendingcertification of these actions. Certification is a procedural step that determineswhether a particular lawsuit may be prosecuted by a representative plaintiff onbehalf of a class of individuals. Certification of a class action does notdetermine the merits of the claim, so that if the Company were unsuccessful indefeating certification, the plaintiffs would still be required to prove themerits of their claims. In addition, the Company believes that it has put inplace reasonable policies, processes and awareness designed to enablecompliance with legal obligations and reduce exposure to legal claims.

 

*Civil liability in the secondary market*

 

On December 31, 2005, Bill 198 came into force in Ontario,creating liability for misrepresentations by public companies in writtendisclosure and oral statements. These amendments also created liability forfraud and market manipulation. Since then, other provinces and territories haveadopted similar legislation.

 

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The legislation creates a right of action for damages against TELUS,its directors and certain of its officers in the event that TELUS or a personwith actual, implied or apparent authority to act or speak on behalf of TELUSreleases a document or makes a public oral statement that contains amisrepresentation or TELUS fails to make timely disclosure of a materialchange.

 

The legislation permits action to be taken by any person or companythat acquires or disposes of TELUS securities in the secondary market duringthe period of time that the misrepresentation remains uncorrected in the publicor, in the case of an omission, until such time as the material change has beendisclosed. It is not necessary for the person or company to establish that theyrelied on the misrepresentation in making the acquisition or disposition.

 

*Risk mitigation:*In 2005, TELUS conducted a review of itsdisclosure practices and procedures and the extent to which they aredocumented. As part of that review, TELUS consulted external advisors. Thisreview indicated that TELUS has well-documented and fulsome processes in place,including a corporate disclosure policy that restricts spokespersons tospecifically designated senior management, provides a protocol for dealing withanalysts and oral presentations, outlines the communication approach to issues,and has a disclosure committee to review and determine disclosure of materialinformation. TELUS monitors legal developments and re-evaluates annually itsdisclosure practices and procedures, including in 2008, and believes that theycontinue to be appropriate and prudent and that its risk exposure is reasonableand has not changed significantly over the past 12 months. However, there canbe no assurance that TELUS’ processes will be followed by all team members atall times.

 

*Legal and regulatory compliance*

 

TELUS relies on its employees, officers, Board of Directors, keysuppliers and partners to demonstrate reasonable legal and ethical standards.Situations might occur where individuals do not adhere to TELUS policies, orwhere personal information of a TELUS customer or employee is inadvertentlycollected, used or disclosed in a manner that is not fully compliant withlegislation, thereby exposing TELUS to the possibility of damages, sanctionsand fines, or negatively affecting financial or operating results.

 

In 2008, the Company continued to expand its activities into the UnitedStates and other foreign jurisdictions. Its subsidiaries that operate inforeign jurisdictions are required to comply with local laws and regulations,which may differ substantially from Canadian laws and add to the legal and taxexposures the Company faces.

 

*Risk mitigation:*Although management cannot predict outcomeswith certainty, management believes it has reasonable policies, processes andawareness in place for proper compliance and that these programs are having apositive effect on reducing risks. Since 2002, TELUS has instituted for itsemployees, officers and directors an ethics policy and in 2003, established atoll-free EthicsLine for anonymous reporting by anyone who has issues orcomplaints. Since 2003, TELUS has had a designated compliance officer, whoserole is to work across the enterprise to ensure that the business has theappropriate controls and measurements in place to facilitate legal andregulatory compliance, including compliance under privacy legislation. Forexample, as a proactive measure on privacy compliance, TELUS places a controlin the project development stage of major projects by requiring a privacyimpact assessment to be performed for all major projects involving the use ofcustomer or team member personal information.

 

In 2008, and in response to the Company’s expansion of its activitiesinto the United States and other foreign jurisdictions, the Company nearedcompletion of testing and implementation of major billing and financialreporting system upgrades to accommodate present and future cross-borderservice requirements. Also in 2008, the Company launched a program to supportTELUS’ business plans for limited expansion and service extension into additionalforeign jurisdictions.  In the firstphase of this program, TELUS completed its assessment of the Company’s businessprocesses and gating controls that strive to ensure that all foreign expansioninitiatives receive appropriate review by regulatory, legal and taxationadvisors.  Such reviews support ongoingcompliance with domestic and foreign regulatory, legal and taxationrequirements.

 

The compliance officer reports jointly to the Audit Committee and theSenior Vice-President and Chief General Counsel. This dual reporting providesdirect line-of-sight reporting to the Audit Committee to address identifiedrisks. In addition, legal counsels qualified in the relevant foreignjurisdictions are engaged by TELUS’ subsidiaries to provide legal advice asappropriate.

 

*Intellectual property and proprietary rights*

 

Technology evolution also brings additional legal risks anduncertainties. The intellectual property and proprietary rights of owners anddevelopers of hardware, software, business processes and other technologies maybe protected under statute, such as patent, copyright and industrial designlegislation, or under common law, such as trade secrets. With the growth anddevelopment of technology-based industries, the value of these intellectual propertyand proprietary rights has increased. Significant damages may be awarded inintellectual property infringement claims advanced by rights holders. Inaddition, defendants may incur significant costs to defend such claims and thatpossibility may prompt defendants to settle claims more readily, in part tomitigate those costs. Both of these factors may incent intellectual propertyrights holders to more aggressively pursue infringement claims.

 

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Given the vast array of technologies and systems used by TELUS and itsaffiliates to deliver their products and services, and with the rapid changeand complexity of such technologies, disputes over intellectual property andproprietary rights can reasonably be expected to increase. As a user oftechnology, TELUS and its affiliates receive from time to time communications,ranging from solicitations to demands and legal actions, from third partiesclaiming ownership rights over intellectual property used by TELUS and itsaffiliates and asking them to pay a settlement or licensing fees for thecontinued use of such intellectual property. There can be no assurance thatTELUS and its affiliates will not be faced with significant claims based on thealleged infringement of intellectual property rights, whether such claims arebased on a legitimate dispute over the validity of the intellectual propertyrights or their infringement, or whether such claims are advanced for theprimary purpose of extracting a settlement. TELUS and its affiliates may incursignificant costs in defending infringement claims, and may suffer significantdamages and lose the right to use technologies that are essential to theiroperations should any infringement claim prove successful.

 

*Risk mitigation:* While TELUS and its affiliates incorporatemany technologies into their products and services, they are not primarily inthe business of creating or inventing technology. In acquiring products andservices from suppliers, it is the practice of TELUS and its affiliates to seekand obtain contractual protections consistent with industry practices, to helpmitigate the risks of intellectual property infringements.

 

### **10.10 Manmade andnatural threats**

### ** **

*Concerns about natural disasters and intentional threats to TELUS’infrastructure, Canadian and international business operations*

 

TELUS is a key provider of critical communications infrastructure inCanada and has certain supporting business functions located internationally inseveral countries (including the Philippines). The Company’s network,information technology, physical assets, team members and business results maybe materially impacted by exogenous threats, including natural disasters,seismic and severe weather-related events such as ice, snow and wind storms,flooding, wildfires, typhoons/hurricanes, tornadoes and tsunamis; intentionalthreats such as sabotage, terrorism, labour disputes and political and civilunrest; dependence on the provision of service to the Company by otherinfrastructure providers (e.g. power); and public health threats such aspandemics.

 

TELUS continues to recognize that global climate change may exacerbatecertain of these threats, including the frequency and severity ofweather-related events.

 

*Risk mitigation:* TELUS has an extensive ongoing enterprise-widebusiness continuity program (BCP) with resources dedicated to design, exercise,maintain, execute and monitor business continuity/disaster recovery policies,plans and processes that address a range of scenarios. This approach is focusedon supporting TELUS’ continued ability to serve customers, protect corporateassets, and strive to ensure employee protection and safety by institutingresiliency planning in the Company’s day-to-day business operations. In regardto internationally situated business support and outsourcing functions, TELUShas acquired and/or announced expansion of these activities to four additionalcountries in different geographic regions to mitigate the risk of locatingthese functions in one country.

 

Although TELUS has business continuity planning processes, there can beno assurance that specific events will not materially impact TELUS operationsand results.

 

*Security —**Electronic attack*

 

Electronic attacks are intentional acts by people to gain unauthorizedaccess to TELUS information or to prevent legitimate users from gaining access.Such attacks may use a range of techniques, from social engineering(non-technical intrusion relying heavily on human interaction and trickery tobreak normal security procedures) to the use of sophisticatedsoftware/hardware.

 

*Risk mitigation:*Using a layered security approach, TELUS hasimplemented a number of proactive, reactive and containment processes andsystems to safeguard its IT infrastructure, information repositories andinformation distribution. Security policies and procedures are in place togovern the duties of those responsible for information confidentiality andintegrity. Intrusion detection systems, access controls and incident responseprocedures are in place to provide continuous monitoring of TELUS’ ITinfrastructure.

 

*Security — Vandalism and theft*

 

TELUS has a number of publicly situated physical assets that aresubject to vandalism and/or theft, including public payphones, copper cable,and network and telephone switch centres.

 

*Risk mitigation:* The Company has implemented an array ofphysical and electronic barriers, controls and monitoring systems to protectits assets, considering such factors as asset importance, exposure risks andpotential costs incurred should a particular asset be damaged or stolen. As anadditional level of risk management, TELUS has a corporate

 

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security group that continually investigates and evaluates the risks and,in co-operation with law enforcement and other external agencies, adjusts itsprotection to meet changing risks.

 

Although TELUS has IT andnetwork security planning processes and thorough physical asset securityplanning processes, there can be no assurance that specific events will notmaterially impact TELUS operations and results.

 

### **10.11 Economicgrowth and fluctuations**

### ** **

It isexpected that the slower Canadian economic growth in the fourth quarter of 2008will continue into much of 2009, reflecting a significant reduction incommodity prices, a U.S. economy in recession, weakened global economic growth,and continued tight global credit conditions. The principal risk to the currentview of the Canadian economy is the impact of the continued negative developmentsoccurring globally on Canadian business and consumer confidence, and thus isexpected to impact both the business and consumer sectors.

 

*Continuation of economic uncertainty or recessions may adversely impactTELUS*

 

An extended economic downturnmay cause residential and business telecommunications customers to delay newservice purchases, reduce volumes of use, discontinue use of services or seeklower-priced alternatives. Significant economic downturns or recessions couldadversely impact TELUS’ profitability, free cash flow and bad debt expense, andpotentially require the Company to record impairments to the carrying value ofits assets including, but not limited to, its intangible assets with indefinitelives (spectrum licences) and its goodwill. Impairments to the carrying valueof assets would result in a charge to earnings and a reduction in shareholders’equity, but would not affect cash flow.

 

*Risk mitigation:*The Company cannot completelymitigate economic risks. TELUS has continued to benefit from healthy ongoinggrowth in the Canadian wireless sector. Through most of 2008, TELUS continuedto benefit from growth in the cyclical resource economies in B.C. and Alberta,which are now expected to experience lower future growth. TELUS has continuedto add business customers in Central Canada, focusing on four key verticalmarkets of the public sector, healthcare, financial services and energy, whichare generally expected to be less exposed to the economic downturn than themanufacturing and export-oriented industries in Ontario and Quebec. To mitigateworsening economic impacts, TELUS may pursue additional cost reduction andefficiency initiatives, as well as reduce NCIB share repurchases and/or capitalexpenditures.

 

*Pension funding*

 

Economic fluctuations could also adversely impact the funding andexpense associated with the defined benefit pension plans that TELUS sponsors.There can be no assurance that TELUS’ pension expense and funding of itsdefined benefit pension plans will not increase in the future and therebynegatively impact earnings and/or cash flow. Defined benefit funding risks mayoccur if total pension liabilities exceed the total value of the respectivetrust funds. Unfunded differences may arise from lower than expected investmentreturns, reductions in the discount rate used to value pension liabilities, andactuarial loss experiences.

 

*Risk mitigation:*TELUS seeks to mitigate this riskthrough the application of policies and procedures designed to controlinvestment risk and ongoing monitoring of its funding position. Pension expenseand funding for 2009 were largely determined by the rates of returnon the plans’ assets for 2008 and interest rates at year-end 2008. As at December 31, 2008, theCompany’s best estimate for defined benefit pension plans expense in 2009 is$18 million, as compared to a recovery of approximately $100 millionin 2008, and the Company’s estimate of cash contributions to its definedbenefit pension plans in 2009 is $211 million ($102 million in 2008).

 

## **11. Reconciliation of non-GAAPmeasures and definition of key operating indicators**

## ** **

### **11.1 Earningsbefore interest, taxes, depreciation and amortization (EBITDA)**

### ** **

TELUS has issued guidance on and reports EBITDAbecause it is a key measure used by management to evaluate performance ofbusiness units, segments and the Company. EBITDA is also utilized in measuringcompliance with debt covenants. (See *Section 11.4 — EBITDAexcluding restructuring costs.*) EBITDA is a measure commonlyreported and widely used by investors as an indicator of a company’s operatingperformance and ability to incur and service debt, and as a valuation metric.The Company believes EBITDA assists investors in comparing a company’sperformance on a consistent basis without regard to depreciation andamortization, which are non-cash in nature and can vary significantly dependingupon accounting methods or non-operating factors such as historical cost.

 

EBITDA is not a calculation based on Canadian or U.S.GAAP and should not be considered an alternative to Operating income or Netincome in measuring the Company’s performance, nor should it be used as anexclusive measure of cash flow, because it does not consider the impact ofworking capital growth, capital expenditures, debt principal reductions andother sources and uses of cash, which are disclosed in the Consolidatedstatements of cash flows. Investors should carefully consider the specificitems included in TELUS’ computation of EBITDA. While EBITDA has been disclosedherein

 

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to permit a more complete comparative analysis of theCompany’s operating performance and debt servicing ability relative to othercompanies, investors should be cautioned that EBITDA as reported by TELUS maynot be comparable in all instances to EBITDA as reported by other companies.

 

The following is a reconciliation of EBITDA withNet income and Operating income. EBITDA (as adjusted) excludes a charge forintroducing a net-cash settlement feature for share option awards granted priorto 2005. EBITDA and EBITDA (as adjusted) are regularly reported to the chiefoperating decision-maker.

 
| ** **                           | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                 |       |                                       |       |   |   |
| **Net  income**                      | ** ** | **1,128**                                  | ** ** | 1,258 |   |
| Other  expense (income)              | ** ** | **36**                                     | ** ** | 36 |   |
| Financing  costs                     | ** ** | **463**                                    | ** ** | 440 |   |
| Income taxes                         | ** ** | **436**                                    | ** ** | 233 |   |
| Non-controlling  interest            | ** ** | **3**                                      | ** ** | 7 |   |
| **Operating  income**                | ** ** | **2,066**                                  | ** ** | 1,974 |   |
| Depreciation                         | ** ** | **1,384**                                  | ** ** | 1,355 |   |
| Amortization  of intangible assets   | ** ** | **329**                                    | ** ** | 260 |   |
| **EBITDA**                           | ** ** | **3,779**                                  | ** ** | 3,589 |   |
| Net-cash  settlement feature expense | ** ** | **—**                                 | ** ** | 169 |   |
| **EBITDA  (as adjusted)**            | ** ** | **3,779**                                  | ** ** | 3,758 |   |

 

In addition to EBITDA, TELUS calculates EBITDAless capital expenditures as a simple proxy for cash flow at a consolidatedlevel and in its two reportable segments. EBITDA less capital expenditures maybe used for comparison to the reported results for other telecommunicationscompanies over time and is subject to the potential comparability issues ofEBITDA described above.

 
| ** **                                                                                | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                                      |       |                                       | ** ** |   |   |
| **EBITDA**                                                                                | ** ** | **3,779**                                  | ** ** | 3,589 |   |
| Capital  expenditures                                                                     | ** ** | **(1,859**                                 | **)**      | (1,770 | ) |
| **EBITDA  less capital expenditures**                                                     | ** ** | **1,920**                                  | ** ** | 1,819 |   |
| Net-cash  settlement feature expense                                                      | ** ** | **—**                                 | ** ** | 169 |   |
| **EBITDA  (as adjusted) less capital expenditures**                                       | ** ** | **1,920**                                  | ** ** | 1,988 |   |
| Payment for  AWS spectrum licences                                                        | ** ** | **(882**                                   | **)**      | — |   |
| **EBITDA  (as adjusted) less capital expenditures and payment for AWS spectrum licences** | ** ** | **1,038**                                  | ** ** | 1,988 |   |

 

### **11.2 Free cashflow**

### ** **

TELUS reports free cash flow because it is a keymeasure used by management to evaluate its performance. Free cash flow excludescertain working capital changes and other sources and uses of cash, as found inthe Consolidated statements of cash flows. Free cash flow is not a calculationbased on Canadian or U.S. GAAP and should not be considered an alternative to theConsolidated statements of cash flows. Free cash flow is a measure that can beused to gauge TELUS’ performance over time. Investors should be cautioned thatfree cash flow as reported by TELUS may not be comparable in all instances tofree cash flow as reported by other companies. While the closest GAAP measureis Cash provided by operating activities less Cash used by investingactivities, free cash flow is considered relevant because it provides anindication of how much cash generated by operations is available after capitalexpenditures, but before acquisitions, proceeds from divested assets andchanges in certain working capital items (such as trade receivables, which canbe significantly distorted by securitization changes that do not reflect operatingresults, and trade payables).

 

Prospectively, the Company has chosen to present freecash flow adjusted for contributions to employee defined benefit plans, as thecontributions have a significant non-discretionary component and are determinedseparately from the net defined benefit plans expense previously included inthe calculation. The following tables present free cash flow on both bases.

 

The following reconciles free cash flow with Cashprovided by operating activities less Cash used by investing activities:

 

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| ** **                                                                                                                                                         | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                                                                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                                                                                                               |       |                                       |       |   |   |
| **Cash  provided by operating activities**                                                                                                                         | ** ** | **2,819**                                  | ** ** | 3,172 |   |
| **Cash  (used) by investing activities**                                                                                                                           | ** ** | **(3,433**                                 | **)**      | (1,772 | ) |
| ** **                                                                                                                                                         |       | **(614**                                   | **)**      | 1,400 |   |
| Amortization  of deferred gains on sale-leaseback of buildings, amortization of deferred  charges and other, net                                                   | ** ** | **(3**                                     | **)**      | (4 | ) |
| Reduction  (increase) in securitized accounts receivable                                                                                                           | ** ** | **200**                                    | ** ** | — |   |
| Non-cash  working capital changes except changes from income tax payments (receipts),  interest payments (receipts) and securitized accounts receivable, and other | ** ** | **86**                                     | ** ** | (10 | ) |
| Acquisitions                                                                                                                                                       | ** ** | **696**                                    | ** ** | — |   |
| Proceeds  from the sale of property and other assets                                                                                                               | ** ** | **(13**                                    | **)**      | (7 | ) |
| Other  investing activities                                                                                                                                        | ** ** | **9**                                      | ** ** | 9 |   |
| **Free  cash flow based on defined benefit plans employer contributions**                                                                                          | ** ** | **361**                                    | ** ** | 1,388 |   |
| Net employee  defined benefit plans recovery (expense)                                                                                                             | ** ** | **102**                                    | ** ** | 92 |   |
| Employer  contributions to employee defined benefit plans                                                                                                          | ** ** | **104**                                    | ** ** | 93 |   |
| **Free  cash flow based on defined benefit plans net expense**                                                                                                     | ** ** | **567**                                    | ** ** | 1,573 |   |

 

The followingshows management’s calculation of free cash flow.

 
| ** **                                                                                                                    | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ millions)**                                                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                                                                          |       |                                       |       |   |   |
| **EBITDA**                                                                                                                    | ** ** | **3,779**                                  | ** ** | 3,589 |   |
|                                                                                                                          |       |                                       | ** ** |   |   |
| Share-based  compensation                                                                                                     | ** ** | **5**                                      | ** ** | 96 |   |
| Net employee  defined benefit plans expense (recovery)                                                                        | ** ** | **(102**                                   | **)**      | (92 | ) |
| Employer  contributions to employee defined benefit plans                                                                     | ** ** | **(104**                                   | **)**      | (93 | ) |
| Restructuring  costs net of cash payments                                                                                     | ** ** | **16**                                     | ** ** | (18 | ) |
| Donations  and securitization fees included in Other expense                                                                  | ** ** | **(30**                                    | **)**      | (37 | ) |
| Cash  interest paid                                                                                                           | ** ** | **(457**                                   | **)**      | (454 | ) |
| Cash  interest received                                                                                                       | ** ** | **3**                                      | ** ** | 42 |   |
| Income taxes  received (paid) and other                                                                                       | ** ** | **(8**                                     | **)**      | 125 |   |
| Capital  expenditures                                                                                                         | ** ** | **(1,859**                                 | **)**      | (1,770 | ) |
| Payment for  AWS spectrum licences                                                                                            | ** ** | **(882**                                   | **)**      | — |   |
| **Free  cash flow based on defined benefit plans employer contributions**                                                     | ** ** | **361**                                    | ** ** | 1,388 |   |
| Employer  contributions to employee defined benefit plans in excess of net employee  defined benefit plans expense (recovery) | ** ** | **206**                                    | ** ** | 185 |   |
| **Free  cash flow based on defined benefit plans net expense**                                                                | ** ** | **567**                                    | ** ** | 1,573 |   |

 

### **11.3 Definitionof key wireless operating indicators**

### ** **

These measures are industry metrics and are useful inassessing the operating performance of a wireless company.

 

Average revenue per subscriber unit per month (ARPU) iscalculated as Network revenue divided by the average number of subscriber unitson the network during the period and expressed as a rate per month. Data ARPUis a component of ARPU, calculated on the same basis for revenues derived fromservices such as text messaging, mobile computing, personal digital assistancedevices, Internet browser activity and pay-per-use downloads.

 

Churnper month is calculated as the number of subscriber unitsdisconnected during a given period divided by the average number of subscriberunits on the network during the period, and expressed as a rate per month. Aprepaid subscriber is disconnected when the subscriber has no usage for 90 daysfollowing expiry of the prepaid card.

 

Cost of acquisition (COA)consists of the total of handset subsidies, commissions, and advertising andpromotion expenses related to the initial subscriber acquisition during a givenperiod. As defined, COA excludes costs to retain existing subscribers(retention spend).

 

COA per gross subscriber addition iscalculated as cost of acquisition divided by gross subscriber activationsduring the period.

 

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EBITDAexcluding COA is a measure of operational profitabilitynormalized for the period costs of adding new customers.

 

Retention spend to Network revenuerepresents direct costs associated with marketing and promotional efforts aimedat the retention of the existing subscriber base divided by Network revenue.

 

### **11.4 Definitionof liquidity and capital resource measures**

### ** **

Dividend payout ratio and dividendpayout ratio of sustainable net earnings: For actual earnings, the measureis defined as the most recent quarterly dividend declared per share multipliedby four and divided by basic earnings per share for the 12-month trailingperiod. Thetarget guideline for the annual dividend payout ratio is on a prospectivebasis, rather than on a trailing basis, and is 45 to 55% of sustainable netearnings. The dividend payout ratio on an actual basis,excluding income tax-related adjustments and the net-cash settlement feature,is considered more representative of a sustainable calculation.

 

EBITDA — excluding restructuring costs isused in the calculation of Net debt to EBITDA and EBITDA interest coverage,consistent with the calculation of the Leverage Ratio and the Coverage Ratio incredit facility covenants. Restructuring costs were $59 million and$20 million, respectively, for the years ended December 31, 2008 and2007.

 

EBITDA — excluding restructuring costs interestcoverage is defined as EBITDA excluding restructuring costsdivided by Net interest cost. Historically, this measure is substantially thesame as the Coverage Ratio covenant in TELUS’ credit facilities.

 

Interest coverage on long-term debt iscalculated on a 12-month trailing basis as Net income before interest expenseon long-term debt and income tax expense, divided by interest expense onlong-term debt.

 

Net debt is a non-GAAPmeasure whose nearest GAAP measure is Long-term debt, including Currentmaturities of long-term debt, as reconciled below. Net debt is one component ofa ratio used to determine compliance with debt covenants (refer to thedescription of Net debt to EBITDA below).

 
| ** **                                                                                                                                                                        | ** ** | **As at December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **($ millions)**                                                                                                                                                             | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|                                                                                                                                                                              |       |                                 |       |   |   |
| Long-term  debt including current portion                                                                                                                                         | ** ** | **6,352**                            | ** ** | 4,589 |   |
| Debt issuance  costs netted against long-term debt                                                                                                                                | ** ** | **28**                               | ** ** | 30 |   |
| Derivative  liability                                                                                                                                                             | ** ** | **778**                              | ** ** | 1,179 |   |
| Accumulated  other comprehensive income amounts arising from financial instruments used to  manage interest rate and currency risks associated with U.S. dollar denominated  debt | ** ** | **(168**                             | **)**      | (137 | ) |
| Cash and  temporary investments                                                                                                                                                   | ** ** | **(4**                               | **)**      | (20 | ) |
| Proceeds  from securitized accounts receivable                                                                                                                                    | ** ** | **300**                              | ** ** | 500 |   |
| **Net debt**                                                                                                                                                                      | ** ** | **7,286**                            | ** ** | 6,141 |   |

 

Thederivative liability in the table above relates to cross currency interest rateswaps that effectively convert principal repayments and interest obligations toCanadian dollar obligations, and is in respect of the U.S.$1,925 milliondebenture maturing June 1, 2011. Management believes that Net debt isa useful measure because it incorporatesthe exchange rate impact of cross currency swaps put into place that fixthe value of U.S. dollar denominated debt, and because it represents the amountof long-term debt obligations that are not covered by available cash andtemporary investments.

 

Net debt to EBITDA — excluding restructuring costs isdefined as Net debt as at the end of the period divided by the 12-monthtrailing EBITDA — excluding restructuring costs. TELUS’ guideline range for Netdebt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA —excluding restructuring costs is substantially the same as the Leverage Ratiocovenant in TELUS’ credit facilities.

 

Net debt to total capitalizationprovides a measure of the proportion of debt used in the Company’s capitalstructure.

 

Net interest cost is defined asFinancing costs before gains on redemption and repayment of debt, calculated ona 12-month trailing basis. No gains on redemption and repayment of debt wererecorded in the respective periods. Should they occur, losses recorded on theredemption of long-term debt are included in net interest cost. Net interestcosts for the years ended December 31, 2008 and 2007 are equivalent toreported financing costs for those periods.

 

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Totalcapitalization — book value excludes accumulated other comprehensive incomeor loss and is calculated as follows:

 
| ** **                                  | ** ** | **As at December 31** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| **($ millions)**                       | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|                                        |       |                                 |       |   |   |
| Net debt                                    | ** ** | **7,286**                            | ** ** | 6,141 |   |
| Non-controlling  interests                  | ** ** | **23**                               | ** ** | 26 |   |
| Shareholders’  equity                  | ** ** | **7,182**                            | ** ** | 6,926 |   |
| Accumulated  other comprehensive loss       | ** ** | **130**                              | ** ** | 104 |   |
| **Total  capitalization — book value** | ** ** | **14,621**                           | ** ** | 13,197 |   |

 

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